Fitch: US Govt Shutdown Would Not Have Direct Ratings Impact

The US risks a federal government shutdown if Congress does not pass funding legislation by the end of the current fiscal year on September 30 (just six of the 12 necessary spending bills have been passed so far). Alternatively, Congress could agree a continuing resolution to grant the federal government the spending authority needed to avoid a shutdown.

The political backdrop will determine whether short-term uncertainties arise about Congressional intentions on raising or suspending the federal debt limit. Fitch believes the most likely outcome is for a short-term extension to appropriations at current fiscal year 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. 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.

The previous government shutdown on 1 October 2013 did not trigger any change in our US sovereign rating. However, it did herald another bout of political brinkmanship that meant that a continuing resolution was not passed until 17 October - 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. The risk of a crisis that undermined confidence in the budgetary process and timely management of the debt limit was already reflected in the Negative Outlook on the sovereign rating at the time of the last shutdown (we subsequently put the US on Rating Watch Negative before stabilising the Outlook in March 2014, after the debt limit was suspended until mid-March 2015).

Congress and the Presidential administration have more time to reach agreement this time around. The Congressional Budget Office’s (CBO) latest estimate is that extraordinary measures will be exhausted between mid-November and early December. Treasury Secretary Jack Lew warned that cash balances had fallen below the USD150bn minimum in September.

If the debt limit were not suspended or raised in a timely fashion, 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.

Previous US debt limit crises have not undermined the US dollar’s role as the preeminent global reserve currency, but sustained fiscal uncertainty could have a detrimental effect on the US economy and lower market confidence in the authorities’ ability to deal with longer-term fiscal challenges. As well as the budget process and debt limit, there will be other tests of bipartisan fiscal cooperation in the coming months, such as the Highway Trust Fund and the reinstatement of ’tax extenders.’