Moody’s warns about American debt and the “shutdown”

(Boursier.com) — The financial rating agency Moody’s seems ready to crack down on the United States, warning that the government shutdown would harm the country’s credit, according to comments relayed by Reuters. The warning comes to markets just a month after Fitch downgraded the United States by one notch due to a debt ceiling crisis. U.S. government services would be disrupted and hundreds of thousands of federal workers would be furloughed without pay if Congress fails to provide funds for the fiscal year beginning Oct. 1, Moody’s insists. The possible shutdown would be a further demonstration of how political polarization in Washington is weakening fiscal policy at a time of growing pressure from rising interest rates, the Moody’s analyst told Reuters. William Foster.

“If there is not an effective fiscal policy response to try to offset these pressures, then it is likely that this will have an increasingly negative impact on the credit profile,” Foster added, according to which “this could lead to a negative outlook, or even a deterioration at some point, if these pressures are not taken into account.” Moody’s currently rates the United States ‘Aaa’ with stable outlook, its highest rating. It is the last major agency to maintain such a rating, as Fitch downgraded its rating by one notch in August to ‘AA+’ – the same rating as S&P. “Fiscal policy is less robust in the United States than in many ‘Aaa’-rated countries, and a further shutdown would be further evidence of this weakness,” Moody’s said.

RBC Capital Markets has been studying this issue of government shutdowns closely. The broker, cited by Yahoo! Finance, recalls that before the last seven government shutdowns (of 10 days or more) dating back to 1976, the median decline in the S&P 500 was 10.2%. The largest drop, 19.8%, came before the shutdown that lasted from December 21, 2018 to January 23, 2019. The smallest drop in stocks was 3.7% before the 21-day shutdown which ended on January 6, 1996. However, the broker notes that the markets generally rebound once an agreement is reached. In addition, in the twelve months following a closure of 10 days or more, the S&P 500 gained a median of 18.9%. Furthermore, analysis of the 20 closures that have occurred since 1976 shows that shares have progressed in 50% of cases during the effective closure.