Standard & Poor's warns against prolonged US government shutdown

Standard & Poor's has set out its analysis of the consequences of the US government shutdown and the implications for the credit rating of the US.

In our opinion, the current impasse over the continuing resolution and the debt ceiling creates an atmosphere of uncertainty that could affect confidence, investment, and hiring in the U.S.
However, as long as it is short-lived, we do not anticipate the impasse to lead to a change in the sovereign rating. This sort of political brinkmanship is the dominant reason the rating is no longer "AAA".
Standard & Poor's sovereign rating on the U.S. is "AA+" with a stable outlook, which according to our rating criteria indicates that we believe there is a less than 1-in-3 chance of a rating change over the next two years. We revised the outlook on the rating to stable from negative in June of this year, primarily in light of three factors:
• The ability of the branches of government to negotiate a compromise that lessened the impact of the so-called fiscal cliff;
• The decline in the annual general government budget deficit to half of its 2011 level, with projections of further declines through 2015 (10pc of GDP in 2011, 4.9pc in 2013, and 2.9pc in 2015); and
• The strengthening economic recovery.
These developments suggest to us the potential for further compromise and allow more time in deciding upon further fiscal adjustments. Also, most sovereigns find it easier to adjust when the economy is stronger.

The shutdown was widely expected and commentators by and large conclude that a deal will reached with no dramatic changes regarding US fiscal policy.

Robert Wood, economist at Berenberg wrote this morning:

The intransigence over Budget negotiations may, however, show that the politicians will flirt with going past the debt-ceiling deadline to try and get their pound of flesh before seeing sense and averting disaster. Bottom-line, we expect no serious further net tightening in US fiscal policy as a result of any last minute deal. Though an agreement may just be a temporary sticking plaster that funds the government for a few months.

Regarding a possible deal Republicans may offer to Democrats, Mike van Dulken, Head of Research at Accendo Markets, writing to to clients said:

Equities pretty calm with passing of the US budget deadline and beginning of partial government shutdown.

It's Republicans (Congress) demonstrating worry about being blamed for shutdown, suggesting it might be they who give in with a revised proposition, leaving Obama's flagshipHealthcare alone (it comes into effect today anyway, Republicans just wanted to delay), removing just the medical devices tax hike element - potentially enough for Democrats (Senate) to agree to.

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