Government Shutdown May Harm U.S. Credit Quality, Moody’s Says

A U.S. government shutdown or failure to raise the debt limit may slow economic activity, which would damage the nation’s credit quality, according to Moody’s Investors Service.

While the ratings company expects the nation’s leaders will avoid a shutdown and increase the debt limit, if it fails to do so “the consequences for the economy and government revenues would be negative,” it said in a report today.

“Financial market and economic consequences would likely be more severe if the debt limit is not raised than under a government shutdown,” Moody’s said. “The perception that the U.S. government could default on debt servicing if the debt limit isn’t raised could roil financial markets and damage business and consumer confidence.”

Moody’s changed its outlook on the U.S.’s top Aaa grade in July to stable from negative. Standard & Poor’s stripped the nation of its top ranking in August 2011, citing in part wrangling over raising the debt limit. Fitch Ratings, which has a negative outlook on its AAA grade, has said its assessment of the country’s credit is taking into account the political debate over raising the debt ceiling.

Yields on 10-year Treasuries touched 2.67 percent today, the lowest since Aug. 13.

Treasury Secretary Jacob J. Lew has urged lawmakers to raise the $16.7 trillion debt limit by the middle of next month and has said if they don’t the Treasury would be forced to use about $50 billion in cash to fund the government.

The Senate is considering a measure the House passed Sept. 20 that cuts off money for President Barack Obama’s health-care law and finances the federal government through mid-December. Democratic leaders in the Senate said they won’t pass a bill that takes money away from the 2010 law.

“Our focus on the rating is the longer-term debt trajectory, and we don’t think these short-term events are going to affect that in any substantive way,” Steven Hess, Moody’s senior vice-president and lead sovereign analyst for the U.S., said in a telephone interview.

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