The re-emergence of the threat of a U.S. government shutdown would not have a direct impact on the sovereign’s “AAA” rating. But it could portend future budgetary turmoil, says New York-based credit rating agency Fitch Ratings in a release published today.
Once again, the U.S. is facing the risk of a federal government shutdown if Congress does not pass funding legislation by the end of the current fiscal year, which is September 30. So far, just six of the 12 necessary spending bills have been passed, Fitch notes.
Alternatively, Congress could agree on a continuing resolution to grant the federal government the spending authority needed to avoid a shutdown. If there is a shutdown, Fitch says, it won’t directly hurt the credit rating. Rather, the main implication would depend on whether it brings on further turmoil in U.S. budget policymaking, including brinkmanship over the federal debt limit.
Fitch believes the most likely outcome is for a short-term extension to appropriations at current levels, postponing a longer-term deal until late 2015.
“Such a deal would temporarily lift spending caps for the coming fiscal year in return for consolidation measures in future, and either raise or suspend the debt limit for a limited period,” Fitch says in the release. “A government shutdown may even be a catalyst for such an outcome. This is consistent with our long-held view that a ‘grand bargain’ on deficit and debt reduction is unlikely before the 2016 presidential elections.”
Fitch notes that the previous government shutdown, in October 2013, did not trigger any change in its sovereign rating. “However,” Fitch says, “it did herald another bout of political brinkmanship that meant that a continuing resolution was not passed until October 17 — the same day that the Treasury had said it would exhaust extraordinary measures that provide it with flexibility to fund the federal government without additional net borrowing.
“If the debt limit were not suspended or raised in a timely fashion,” Fitch adds, “immediate potential ratings consequences would depend on the ability of the Treasury Department to either draw out extraordinary financing measures beyond the current estimated timeframe or compose alternative financing solutions that are as yet undefined. A missed payment on a Treasury security is considered a tail risk.”
Fitch says that previous U.S. debt limit crises have not undermined the U.S. dollar’s role as the preeminent global reserve currency. But, it points out, sustained fiscal uncertainty could have a detrimental effect on the U.S. economy and lower market confidence in the authorities’ ability to deal with longer-term fiscal challenges.