Moody's warns government shutdown would be negative for US debt rating as it would highlight weak governance

• A government shutdown would be "credit negative" for the US debt rating, Moody's warned Monday.
• A shutdown would highlight how political polarization is weakening fiscal policymaking, it said.

A government shutdown would be "credit negative" for the US debt rating, Moody's Investors Service warned on Monday.

The credit rating agency, which is the last major outfit that still gives the US a top score, highlighted how political dysfunction is a burden on the country's financial wellbeing.

While a shutdown wouldn't impact debt service payments, "it would underscore the weakness of US institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years," Moody's explained.

Meanwhile, an extended shutdown would be disruptive to the US economy and financial markets, with potential negative ramifications for debt affordability, it added.

And coming just months after the brinkmanship over the US debt ceiling, "a government shutdown would demonstrate the significant constraints that intensifying political polarization continue to put on US fiscal policymaking during a period of declining fiscal strength, driven by persistent fiscal deficits and deteriorating debt affordability," Moody's said.

If US lawmakers don't agree on a spending bill for the next fiscal year, which starts October 1, the government will shut down this weekend.

The statement from Moody's echoed the sentiment from Fitch Ratings earlier this year. Although the US avoided a catastrophic default on its debt over the summer, the debt ceiling fight prompted Fitch to downgrade the country's credit.

"In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," the agency said.

Moody's also noted that US debt service costs, which are rising due to higher interest rates and debt, mean the government will have less fiscal flexibility.

And mobilizing enough political support to pass a comprehensive plan for tackling the explosion in deficits via entitlement reform and increased revenue "appears extremely difficult in the current highly polarized political environment," it said.

"Looking ahead, weaker fiscal policymaking that leads to persistently high fiscal deficits and higher-than-expected interest costs would put pressure on the US rating or outlook," Moody's warned.