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Fights between Washington lawmakers have grown increasingly vicious even as the stakes couldn’t be higher. Disputes on Capitol Hill have consequences, and the latest could lead to another credit rating downgrade that could severely damage the U.S. economy.
Over the summer, bickering nearly led the United States to default on its debt for the first time since the nation was founded nearly 250 years ago. Then, over the weekend, the government narrowly avoided a shutdown thanks to a deal Republican Rep. Kevin McCarthy forged with Democrats.
But the move to keep the government funded until mid-November sparked an effort by hardline Republicans, led by Florida Rep. Matt Gaetz, to unseat McCarthy as House speaker. They got it in a historic vote on Tuesday.
Don’t expect this to go unnoticed by Moody’s Investors Service, the last of the three major credit rating agencies to assign U.S. debt the highest possible AAA rating.
The first time that another major credit rating agency, S&P, downgraded US debt was in 2011. Although lawmakers managed to reach a deal at the last minute to avoid a debt default, S&P considered the speech to be so substantial that it called into question the government’s reliability when it comes to paying its bills on time.
The S&P move had tremendous impacts on the market, causing sharp declines in the stock market and increases in bond yields.
Fitch reached the same conclusion in August, downgrading the U.S. debt rating from AAA to AA+. The move triggered a sell-off in the stock market and pushed the 10-year Treasury yield to what was then its highest level since November. But it wasn’t long before markets recouped those losses.
Since then, all eyes have turned to Moody’s, which has maintained a AAA rating on US debt since 1917.
Last week, Moody’s warned that a government shutdown could lead it to downgrade US debt.
“While public debt service payments would not be affected and a short-term shutdown is unlikely to disrupt the economy, it would underscore the weakness of the United States’ institutional and governance strength relative to other AAA-rated sovereigns. that we have highlighted in recent years. ”Moody’s wrote.
“In particular, it would demonstrate the significant constraints that intensifying political polarization imposes on fiscal policymaking at a time of declining fiscal strength, driven by rising fiscal deficits and deteriorating debt affordability,” Moody’s said.
When Moody’s said that, the prospect of a shutdown was much greater than the prospect of McCarthy being ousted. But just because the government shutdown didn’t work this round doesn’t mean the people at Moody’s in charge of rating U.S. debt are thinking the crisis was averted.
All the contrast.
There have been 14 government shutdowns since 1980. The last time a president was expelled from the House of Representatives? Never.
If anything, this is even more a sign of – as Moody’s put it – “intensifying political polarization.”
Markets were already having a tumultuous day on Tuesday before the vote to unseat McCarthy ended.
U.S. Treasury yields rose to their highest levels in more than a decade, worrying investors that higher borrowing rates could further cripple the housing market.
The Dow Jones fell 430 points, or 1.3%, hitting its lowest close since June and falling so far this year. The benchmark S&P 500 index fell 1.4%, hitting its lowest close since May. The Nasdaq Composite lost 1.9%, extending the late summer selloff.
A downgrade from Moody’s could send Treasury yields soaring even higher, underscoring the heightened risks associated with holding U.S. debt. That would increase the cost of borrowing money, since banks and other lenders often base interest rates on U.S. bond yields.
That would increase the pressures facing the U.S. economy and could even increase the likelihood of a recession.