(NewsNation) — If the United States government were to shut down, there would be negative implications for its credit assessment, Moody’s said Monday.
“A shutdown would be credit negative for the US sovereign,” Moody’s said in a statement. “In particular, it 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 is the only major credit to assign the U.S. a top rating of triple-A, according to Bloomberg. While Moody’s stopped short of actually downgrading the federal government, the warning comes a month after another credit ratings agency did so.
What is a credit rating?
A credit rating, as defined by the U.S. Securities and Exchange Commission, is an assessment of whether an entity is able to pay its financial obligations. This ability to pay these is referred as to the entity’s creditworthiness. Credit rating agencies, such as Moody’s, analyze an institution’s creditworthiness on a scale from tripe-A (the highest it can be) to D (default, or the lowest).
Credit ratings can be assigned to companies and governments, but do not apply to equity securities such as common stock, according to the SEC.
What is the United States’ current credit rating?
While Moody’s assigned the U.S. with a triple-A rating, the highest it can be, other crediting agencies have downgraded the federal government in recent years.
Most recently Fitch Ratings, citing rising debt at federal, state and local levels as well as a “steady deterioration in standards of governance” for the last 20 years, downgraded the United States government’s credit rating last month. This took the U.S. from AAA to AA+ in Fitch’s eyes.
Back in 2011, Standard & Poor’s knocked the U.S. to AA+ as well because of a prolonged dispute over the borrowing limit which raised the Treasury’s borrowing costs by $1.3 billion that year.
What does that mean for the US government?
A lower credit rating over time can raise the U.S. government’s borrowing costs. This is because when an issuer of debt has its credit downgraded, it has to pay a higher interest rate to compensate for a higher risk of potential default.
However, rating agency downgrades usually have more of an effect on smaller debt issuers, such as municipal governments, rather than federal agencies. This is especially true for the U.S., which has the world’s reserve currency. As the Council on Foreign Relations writes, the dollar being the primary reserve currency in the global economy lets the U.S. borrow money easily and impose financial sanctions.
Back when Fitch first gave the U.S. its first AA+, Robert K. Triest, professor and chair of the Department of Economics at Northeastern University, said it’s doubtful that there would be a “discernible impact on any real economic activity.”
“It’s news that they did a downgrade, but it’s really not changing anything,” he said. While it is an indicator of a “deterioration of the political process that makes it more difficult for our government to solve fiscal problems,” Triest pointed out that that issue has been “decades in the making.”
Ryan Detrick, chief market strategist at Carson Group, told CNBC after Fitch downgraded the federal government that U.S. Treasurys will likely remain among the safest investments in the world.
“There might be 11 countries with higher-rated debt than us, but we still like our chances that we have the world’s reserve currency and favored debt,” Detrick said to the news outlet.
In addition, few pension funds are limited to only holding triple-A rated debt, so an AA+ rating from credit agencies is high enough to maintain demand for Treasurys.
Moody’s, though, writes that the U.S. losing its top creditworthiness rating could make the country look worse on a global stage.
“Fiscal policymaking is less robust in the U.S. than in many AAA-rated peers, and another shutdown would be further evidence of this weakness,” Moody’s said in a statement.
What would this mean for everyday Americans?
Higher interest rates for the federal government would mean higher interest rates for taxpayers.
This means higher mortgage and credit card rates at a time when Americans are already having to tighten their belts, Jon Maier, chief investment officer at Global X ETFs, said at CNBC. At the same time, Maier said, those with money in a savings account, or using it to buy bonds, can earn a more robust interest rate.
Overall, though, credit downgrades are a “nonevent” for most consumers, Gus Faucher, senior vice president and chief economist at PNC Financial Services Group, said in an NBC article.
As for stocks, Fidelity writes that they generally react over time to changes in economic growth, as well as the direction of corporate earnings, as opposed to political events. Historically, though, stock markets have turned volatile during “periods of heightened concern about the fiscal wellbeing of the federal government.”
NPR points out that after Standard & Poor’s took away the United States’ triple-A rating, the markets slumped. Reactions after Fitch downgraded were more “muted,” as the reasons for it were more widely known, as political divides and a growing debt have been evident for years.
Reuters and The Associated Press contributed to this story.