Moody’s Explain The ‘Negative’ of US Govt Shutdown
By Laxmikant Khanvilkar
Today we will be discussing interesting stuff….the US Government Shutdown, which is likely impact global financial markets adversely….
But before going into the nitty-gritty of the US govt shutdown and its likely global influence….explained to us by Moody’s – the only rating agency which is still to downgrade the credit rating of the world’s largest economy….
So why we are talking about the govt shutdown….
To begin with, we have to understand what is prompting the US government to take such a drastic step….of shutting-down the government….
So, the US govt is running a risk of ‘shutdown’ after September 30, when its coffers would run-dry….. unless the Congress reach a deal to pass the spending bill.
Raising alarm about any such move, Moody’s said a shutdown would be “credit negative for the US sovereign”.
The rating agency ringing alarm bells is more timely and critical, since the atmosphere is rife with political wrangling.
There’s a standoff between the lawmakers – Republics and Democrats – and White House officials warned a shutdown was growing likely unless a rightwing flank of House Republicans compromised with their own party’s leadership and voted to continue funding the government.
A shutdown could go into effect as early as this Sunday, furloughing millions of workers and bringing a halt to parts of the federal government.
Moody’s report was not an official ratings decision, but it highlighted a shutdown would “underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns” and show “the significant constraints that intensifying political polarisation put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability”.
Wondering about what the rating downgrade has to do with financial markets……
Let me tell you, recently…..in fact in August, Fitch Ratings, another heavyweight in the ratings sphere, yanked away the U.S.’s triple A rating, citing weakened governance. As a result, equity markets went into a tailspin…..
The story doesn’t end there. Back in 2011, S&P took a similar stance after a U.S. budget standoff, pulling down its rating.
Typically, such downgrades would inflate a country’s borrowing costs.
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