Moody’s cuts USA’s credit outlook to negative on rising interest rate and political polarisation
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
Moody’s, though, left the nation’s AAA credit score intact for now, keeping it as the last of the big three ratings firms to maintain the US at the top mark. Fitch Ratings lowered its rating to AA+ from AAA in August, and Standard & Poor’s downgraded the US in 2011.
The credit rating agency Moody’s Investors Service on Friday lowered its outlook on the US credit rating to “negative” from “stable,” citing the cost of rising interest rates and political polarisation in Congress, a move that drew immediate criticism from President Joe Biden’s administration.
Moody’s in a statement said 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.”
The credit rating agency, though, retained its top triple-A credit score on the US government debt intact for now, keeping it as the last of the big three ratings firms to maintain the US at the top mark.
The agency warned of “downside risks” because of a rising budget deficit with no apparent plan to rein in the deficit at a time of significantly higher interest rates from the US Federal Reserve.
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’s fiscal deficits will remain very large, significantly weakening debt affordability,” the agency said.
Brinkmanship in Washington has also been a contributing factor, Moody’s said.
“Recently, multiple events have illustrated the depth of political divisions in the US: Renewed debt limit brinkmanship, the first ouster of a House Speaker in US history, prolonged inability of Congress to select a new House Speaker, and increased threats of another partial government shutdown,” the agency said.
The move follows a rating downgrade of the sovereign by another ratings agency, Fitch, this year, which came after months of political brinkmanship around the US debt ceiling.
Fitch Ratings lowered its rating to AA+ from AAA in August, and Standard & Poor’s downgraded the US in 2011. A reduced outlook, however, raises the risk that Moody’s could eventually strip its triple-A rating from the US as well.
Federal spending and political polarisation have been a rising concern for investors, contributing to a selloff that took US government bond prices to their lowest levels in 16 years.
“It is hard to disagree with the rationale, with no reasonable expectation for fiscal consolidation any time soon,” said Christopher Hodge, chief economist for the US at Natixis. “Deficits will remain large … and as interest costs take up a larger share of the budget, the debt burden will continue to grow.”
A lower rating on the US debt could cost taxpayers if it leads borrowers to demand higher interest rates on Treasury bills and notes. The yield on the 10-year Treasury has risen significantly since July, from about 3.9% to 4.6% Friday, an unusually sharp rise.
Some market analysts have said the August Fitch downgrade may have contributed to that increase, though most point to other factors as bigger drivers, such as the Federal Reserve’s commitment to keeping its benchmark rate at a 22-year high to battle inflation.
Biden administration criticises Moody’s decision
Treasury Department officials said they disagreed with the negative outlook.
“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. “The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”
Adeyemo said the Biden administration had demonstrated its commitment to fiscal sustainability, including through over $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 $2.5 trillion over the next decade.
Karine Jean-Pierre, White House press secretary, suggested the move was “yet another consequence of congressional Republican extremism and dysfunction”.
The federal government’s budget deficit jumped to $1.7 trillion in the budget year that ended September 30, up from $1.38 trillion the previous year. Analysts have warned that with interest rates heading higher, interest costs on the national debt will eat up a rising share of tax revenue.
Separately, congressional lawmakers left Washington for the weekend without a plan to avoid a potential government shutdown that could occur by November 17. Moody’s cited congressional dysfunction as one reason it lowered its outlook on US debt.
Moody’s lower outlook comes after a bond selloff that has pushed long-term Treasury debt yields to levels not seen since 2007 in recent weeks.
An environment of higher interest rates will likely result in higher interest payments and higher deficits, William Foster, a senior vice president at Moody’s, told Reuters.
“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,” Foster added.
(With inputs from agencies)
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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow