Potential Impact of U.S. Government Shutdown

Moody's, a reputable ratings agency, has declared that a partial government shutdown in the U.S. would have a negative effect on the country's credit. With the clock ticking towards a critical Saturday deadline, time is running out to pass a stopgap budget.

According to Moody's, a shutdown would highlight the significant challenges posed by political polarization when it comes to fiscal policymaking. This situation arises at a time when fiscal strength is declining due to widening deficits and deteriorating debt affordability. Worth noting, Moody's currently holds a triple-A rating for the U.S. government.

As previously reported, there is ongoing conflict between hardline Republicans and House Speaker Kevin McCarthy regarding spending. It's possible that McCarthy, a California Republican, will be compelled to strike a deal with Democrats in order to keep the government operational beyond midnight Saturday.

Certain House Republicans are pushing for spending targets for the upcoming fiscal year that are lower than those agreed upon by McCarthy and President Joe Biden back in May when raising the debt ceiling. The new fiscal year begins on Sunday, October 1.

If lawmakers fail to act before this date, workers' paychecks and essential inspections related to the environment and food safety would be at risk. However, historical analysis suggests that the stock market (SPX) would likely remain unaffected.

Furthermore, Moody's expects that any economic impact resulting from a shutdown would be relatively short-lived. Nonetheless, the longer the shutdown persists, the more detrimental its potential impact on the broader economy becomes.

"A prolonged shutdown would likely disrupt both the U.S. economy and financial markets," warns Moody's.

In the previous month, Fitch Ratings downgraded the U.S.'s top credit rating from AAA to AA+. This downgrade was based on concerns regarding governance erosion and the nation's projected fiscal decline over the next three years.