Kevin McCarthy’s Ouster Could Hurt the US Credit Rating

The U.S. government avoided a government shutdown this weekend, but the continued infighting in the Republican party and general discord in Washington could still hurt its credit rating.

Rep. Kevin McCarthy’s short reign as speaker of the House ended in his ouster following a historic vote on Tuesday night. Even as ​​Congress avoided a government shutdown by passing a last-minute stopgap funding bill on Saturday, largely thanks to McCarthy’s apparent compromise with Democrats, his ouster is the latest example of political discord that has cast doubt on U.S. lawmakers’ ability to effectively govern the nation.

All three major credit rating firms — Moody's Investors Service, S&P Global and Fitch Ratings — have flagged dysfunction in Washington in downgrades to various sovereign debt ratings in recent years. 

Last week, Moody’s Investors Service warned that a shutdown would have a negative impact on U.S. credit. While the economic impacts of a shutdown would likely be short-lived, Moody's said the inability of Congress to get a budget deal done underscores the "weakness of U.S. institutional and governance strength" compared to other sovereign nations.

Even the hasty weekend deal that kept the lights on at federal agencies is temporary — a 45-day extension before another budget battle and potential shutdown threatens to stall the economy.

The debt ceiling talks earlier this year were another nail biter, with a last-minute deal hammered out days before the Treasury said the U.S. would technically default on some of its bonds. Fitch Ratings downgraded the U.S. credit rating to “AA” from its top “AAA” rating at the time, citing the nation's ballooning debt, debt-limit stalemates in Congress and last-minute resolutions that have eroded confidence in fiscal management, even as lawmakers narrowly avoided a devastating default.

Treasury Secretary Janet Yellen said at the time that Fitch’s downgrade was “arbitrary and based on outdated data.” Others, including White House Press Secretary Karine Jean-Pierre and JPMorgan Chase chief executive Jamie Dimon also criticized the decision. Dimon said, however, that it “doesn't really matter that much.”

Fitch is considered “the third-ranked rating agency,” behind S&P and Moody's, Charles Schwab analyst Kathy Jones wrote in an Aug. 2 research note. Its smaller impact likely mitigated some of the impact of the downgrade; however, a Moody’s downgrade could deal a much larger blow to government credibility and, subsequently, markets.

This isn’t the first time U.S. credit has been called into question over political infighting. In 2011, Standard and Poor’s downgraded the U.S. credit rating for the first time in history due to intense political gridlock and government instability that pushed the federal government the closest it had ever been to defaulting on its debt — a decision that former S&P officials stand by, given the ongoing conflicts in Congress.

“We thought that the political polarization in the country was likely to endure, and secondly, we were also concerned about the rising trajectory of debt,” David Beers, former head of sovereign ratings for S&P, told Reuters in May. “On both of our counts, our expectations, if anything...have been exceeded. I have no doubt in my mind that was the right call.”

Twice this year, S&P has reaffirmed the U.S. AA+/A-1+ sovereign ratings, citing a stable outlook reflected in the U.S.’s institutional checks and balances, strong rule of law, and availability of information that assure predictability in economic policies.

When rating agencies downgrade America’s debt, Washington is forced to pay higher interest rates on Treasury bonds, notes and bills. The 2011 debt-limit standoff raised the Treasury’s borrowing costs by $1.3 billion, according to a 2012 report by the Government Accountability Office.