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US government shutdown threatens credit rating and economic recovery

The US government is facing the risk of a shutdown by the end of this week, as Congress fails to agree on a spending bill to fund federal agencies and programs. The shutdown would have negative consequences for the country’s credit rating, economic growth and financial stability, according to Moody’s, a credit rating agency.

Moody’s warns of credit negative impact

Moody’s, which is the only one of the Big Three credit rating agencies that still gives the US a AAA rating with a stable outlook, warned that a shutdown would be “credit negative” for the US sovereign. It said that a shutdown would “demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.”

Moody’s analyst William Foster told Reuters that if there is not an effective fiscal policy response to offset the pressures from the pandemic, aging population and infrastructure needs, then the likelihood of a negative impact on the credit profile would increase. He said that this could lead to a negative outlook or a downgrade at some point, if those pressures are not addressed.

US government shutdown threatens credit rating and economic recovery

Shutdown would disrupt economy and markets

A government shutdown would also have adverse effects on the economy and the financial markets, especially if it lasts for a long time. Moody’s said that the most direct impact would be through lower government spending, which would reduce economic activity and income. It also said that a prolonged shutdown would likely be disruptive to both the US economy and financial markets, as it would create uncertainty and undermine confidence.

A shutdown would also affect the publication of major economic data, such as GDP, inflation and employment, which are crucial for policymakers and investors. This could hamper the decision-making process of the Federal Reserve, which is expected to start tapering its bond-buying program soon. It could also increase volatility in the stock and bond markets, as investors react to the lack of information and guidance.

Shutdown looms amid political deadlock

The possibility of a shutdown is looming over Washington DC, as Congress has only a few days left to pass a spending bill by October 1, when the new fiscal year begins. However, there is a deadlock among Republicans in the House of Representatives, who are divided over whether to support a bipartisan infrastructure bill and a larger social spending package proposed by President Joe Biden.

Some hardline conservatives are threatening to withhold their votes for the spending bill unless the infrastructure bill is delayed or scrapped. They argue that the infrastructure bill is too expensive and would add to the national debt. They also oppose the social spending package, which includes measures such as expanding health care, child care, education and climate action.

However, some moderate Republicans and Democrats are in favor of passing both bills, saying that they are necessary to boost the economy and address long-term challenges. They also warn that failing to fund the government would damage the country’s reputation and credibility.

The White House has said that it is planning for a potential shutdown, but hopes that Congress will reach an agreement before the deadline. It has also urged lawmakers to raise or suspend the debt ceiling, which is another looming issue that could trigger a default on US obligations if not resolved by mid-October.

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