CHICAGO — There are likely to be “more severe” financial market and economic consequences if Congress fails to raise the debt limit than if Congress fails to avoid a government shutdown, according to a report from Moody’s Investors Service.
“Although the expenditure reduction under the debt limit scenario is smaller, the perception that the U.S. government could default on servicing its debt if the debt limit is not raised could roil financial markets and damage business and consumer confidence,” the rating agency said.
A federal government shutdown would occur if Congress fails to pass a budget or a continuing resolution by Sept. 30, the last day of fiscal year 2013. After that date, authorization for federal discretionary spending ends.
Failure to raise the $16.7 trillion debt limit could cause problems in mid-October, when the U.S. Treasury is expected to have used up all extraordinary measures it can take to finance government options without increasing borrowing.
If the debt limit is not increased, the federal government could only spend the amount of incoming revenues, the report said.
Moody’s expects that a shutdown will be averted and that the debt ceiling will be raised. But the lack of a debt ceiling increase would be more harmful because “market participants would perceive an increased probability of a sovereign default.”
A government shutdown would not affect debt service on Treasuries. Interest payments on Treasuries, like spending on mandatory programs such as Social Security and Medicare, don’t need to be authorized annually, the ratings agency said.
Failure to raise the debt limit would force the government to reduce spending by about 15 to 20%, less than the 38% reduction in non-interest governmental spending that could occur under a federal government shutdown.
However, if the debt ceiling is not raised, spending on both discretionary and non-discretionary spending, including, debt service, could be affected. Although Moody’s does not expect Treasury to stop making interest payments on Treasuries, it said, “the government would have to make painful choices as to which expenditure to cut, and there is no historic precedent that provides confidence that interest payments would be prioritized over discretionary spending.”