Moody’s downgrades outlook on US credit rating from ‘stable’ to ‘negative’
- The agency cited ‘continued political polarisation’ within the US Congress, and points to large fiscal deficits and a decline in debt affordability
- Despite the shift to a negative outlook, Moody’s remains the last of the three major rating agencies to maintain a top rating for the US government
Moody’s on Friday changed its outlook on the US credit rating from “stable” to “negative”, citing large fiscal deficits and a decline in debt affordability.
The move follows a rating downgrade of the sovereign by another rating agency, Fitch, earlier this year, which came after months of political brinkmanship around the US debt ceiling.
Federal spending and political polarisation have been a rising concern for investors, contributing to a sell-off that took US government bond prices to their lowest levels in 16 years.
The ratings agency said in a statement that “continued political polarisation” in Congress raises the risk that lawmakers will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability”.
“Any type of significant policy response that we might be able to see to this declining fiscal strength probably wouldn’t happen until 2025 because of the reality of the political calendar next year,” William Foster, a senior vice-president at Moody’s, said in an interview.
Republicans who control the US House of Representatives expect to release a stopgap spending measure on Saturday, aimed at averting a partial government shutdown by keeping federal agencies open when current funding expires next Friday.
Moody’s is the last of the three major rating agencies to maintain a top rating for the US government. Fitch changed its rating from triple-A to AA+ in August joining S&P, which has an AA+ rating since 2011.
While it changed its outlook – indicating that a downgrade is possible over the medium term – Moody’s affirmed its long-term issuer and senior unsecured ratings at “Aaa” citing the US credit and economic strengths.
“The US’ institutional and governance strength is also very high, supported in particular by monetary and macroeconomic policy effectiveness,” it said.
Top officials in US President Joe Biden’s administration rejected the move.
White House spokeswoman Karine Jean-Pierre said the change was “yet another consequence of congressional Republican extremism and dysfunction”.
Biden signs debt ceiling bill that pulls US back from brink of default
“While the statement by Moody’s maintains the United States’ AAA rating, we disagree with the shift to a negative outlook,” Deputy Treasury Secretary Wally Adeyemo said in a statement.
“The American economy remains strong, and Treasury securities are the world’s pre-eminent safe and liquid asset.”
Adeyemo said the Biden administration had shown its commitment to fiscal sustainability, including through over US$1 trillion in deficit reduction measures included in a June agreement struck with Congress on raising the US debt limit, and Biden’s proposal to reduce the deficit by nearly US$2.5 trillion over the next decade.
Treasury yields have soared this year on expectations the Federal Reserve will keep monetary policy tight, as well as on US-focused fiscal concerns.
The sharp rise in Treasury yields “has increased pre-existing pressure on US debt affordability,” Moody’s said.
A Moody’s downgrade could exacerbate fiscal concerns, but investors have said they are sceptical it would have a material impact on the US bond market, seen as a safe haven because of its depth and liquidity.
