Moody's warns debt limit fight, government shutdown would hurt economy

WASHINGTON -- A federal government shutdown or a failure to raise the debt limit -- both of which could happen next month -- would disrupt financial markets and hurt the U.S. economy, Moody's Investor Services warned Tuesday.

A stalemate over increasing the nation's $16.7-trillion debt limit, which could be breached as early as mid-October, probably would have the more severe consequences because of fears of a first-ever federal government default, the credit rating company said in a report.

The prospect that the U.S. government would fail to make payments on its debt "could roil financial markets and damage business and consumer confidence," Moody's said.

QUIZ: Test your knowledge about the debt limit

Moody's said it expected the White House and Congress to avoid a shutdown, which could take place Tuesday if a spending bill is not approved. And Moody's also said it expected the debt limit would be increased before a default.

Even if there is a shutdown or debt limit breach, neither would lead to a downgrade of the nation's AAA credit rating, said Steven A. Hess, the credit rating company's senior vice president.

"Our rating of the U.S. is based on medium- to long-term trends in government deficits and debt," he said.

"We view the upcoming deadlines as possibly short-term disruptions," Hess continued. "Even if there were to be a brief government shutdown or some delay in raising the debt limit, these short-term events would not materially affect the factors upon which the rating is based."

In 2011, credit rating firm Standard & Poor's downgraded its AAA rating for U.S. debt after a bitter fight over raising the debt limit ended with a last-minute agreement.

Moody's and the other leading credit rating company, Fitch Ratings, did not downgrade the United States. But they put the nation's rating on a negative outlook, meaning a downgrade could take place in three to five years.

In July, Moody's upgraded the outlook to stable because of the shrinking budget deficit and improving economy.

Now, the economic recovery faces a hit if President Obama and congressional Republicans cannot pass a spending bill and raise the debt limit. Some Republicans are insisting on deep spending cuts and stopping funding for the healthcare reform law, which Obama and Democrats oppose.

A shutdown would slow the economy, reducing revenues to the federal government, Moody's said. But the government would still be able to service its debt.

Failure to raise the debt limit would have more dire consequences.

Moody's said it expected federal officials would use incoming revenues to continue paying interest on Treasury securities. But there is no precedent for prioritizing those payments.

On top of that, federal officials "would have to make painful choices as to which expenditures to cut," Moody's said.

"Financial market and economic consequences would likely be more severe if the debt limit is not raised than under a government shutdown," the company said.


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