U.S. Debt Limit Failure Worse Than Shutdown, Moody's Says

By Nicole Hong

A failure by the U.S. government to raise the country's debt limit would result in a more-negative outcome for financial markets and the economy than a government shutdown, Moody's Investors Service said in a report Tuesday.

Congress has until Sept. 30 to pass a federal budget, or else the government will shut down. In addition, the U.S. Treasury is set to bump up against its $16.7 billion borrowing limit around mid-October, unless legislators move to raise the debt ceiling.

While Moody's expects the government to both avoid a shutdown and increase the debt limit, the rating agency said market participants would view a failure to increase the debt limit as the event with the higher probability of sovereign default. By contrast, if the government shut down, it still could make interest payments on its debt, Moody's said.

The perception that the U.S. government may default on its debt "could roil financial markets and damage business and consumer confidence," the agency wrote in the report.

Moody's gives the U.S. its top sovereign rating of triple-A, with a stable outlook. The firm raised its outlook on the U.S. rating from negative two months ago, citing an improved forecast for the U.S. government's debt trajectory.

Fitch Ratings also rates the U.S. at triple-A, although with a negative outlook. Standard & Poor's Ratings Service has the U.S. at double-A-plus, one notch below the top rating, with a stable outlook.

Write to Nicole Hong at [e-mail].

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