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Debt limit row, government shutdown unlikely to hit U.S. rating: Moody's

NEW YORK (Reuters) - An impasse over the U.S. government's debt ceiling would be worse for financial markets than a government shutdown, but neither is likely to hurt the U.S. sovereign credit rating, Moody's Investors Service said on Tuesday.

Moody's expects the United States will avoid a shutdown and increase the debt limit, the rating agency said in a report.

But failure to lift the cap on what the government can borrow could "theoretically affect all categories of government spending, including debt service."

Nevertheless, a debt ceiling impasse and a government shutdown are unlikely to affect the U.S. sovereign rating, a Moody's analyst told Reuters, because the agency is focused on the long-term debt outlook.

"At this time we don't see that (rating cut) as a consequence of these short-term events," said Steven Hess, Moody's lead U.S. sovereign credit analyst.

"The rating is based more on the long-term outlook for the debt, rather than what we think will be short-term events," Hess added.

Moody's also expects the United States to keep paying interest on Treasuries in the event of a debt ceiling standoff, Hess added.

"The U.S. Treasury bond is the benchmark of the world's financial market," Hess said. "To default on that would create a global financial problem."

Congressional authorization for the government to spend money runs out at the end of the fiscal year on September 30, unless Congress passes a "continuing resolution" to keep the government running.

Some Republican lawmakers are threatening to stall the bill in an effort to scuttle President Barack Obama's signature healthcare law.

The government has been scraping up against its $16.7 trillion debt limit since May but has avoided defaulting on any bills by employing emergency measures to manage its cash.

The Treasury is expected to run out of borrowing options around mid-October. Raising the debt limit requires congressional approval.

Standard & Poor's cut the United States' rating from AAA to AA-plus in August 2011 during a previous round of debt ceiling debates.

Moody's rates the United States Aaa with a stable outlook. Fitch rates the country AAA with a negative outlook.

(Reporting by Luciana Lopez Editing by W Simon, James Dalgleish and Chizu Nomiyama)

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