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Moody’s has lowered its outlook on the US’s credit rating to “negative” from “stable”, pointing to a sharp rise in debt servicing costs and “entrenched political polarisation”.
In a Friday update, the rating agency said that the change to its outlook reflected increasing downside risks to the US’s fiscal strength, which “may no longer be fully offset by the sovereign’s unique credit strengths”.
Moody’s added that the drastic rise in Treasury yields this year “has increased pre-existing pressure on US debt affordability”. It added that “in the absence of policy action, [it] expects the US’s debt affordability to decline further, steadily and significantly, to very weak levels compared to other highly rated sovereigns”.
The Federal Reserve has raised interest rates from near zero in March last year to a range of between 5.25-5.5 per cent in a bid to curb inflation. That aggressive campaign of monetary policy tightening has helped to push up benchmark borrowing yields.
In addition to a steep increase in interest costs, Moody’s also highlighted political dangers — pointing to “an increased risk that political divisions could further constrain the effectiveness of policymaking by preventing policy action that would slow the deterioration in debt affordability”.
The US Congress descended into turmoil last month after the Republican Speaker of the House of Representatives was voted out of his role after striking a deal with Democrats to continue funding the government.
However, the short-term deal struck then will expire in one week unless a new agreement is reached, forcing the federal government to shut down some operations and furlough some non-essential workers. A deal to avert that outcome remained distant on Friday.
A change in a rating agency’s outlook can, but does not always, precede a downgrade in a credit rating. Moody’s on Friday reaffirmed the US’s triple A rating, reflecting the agency’s view “that the US’s formidable credit strengths continue to preserve the sovereign’s credit profile.”
Moody’s is the only of the three big credit rating agencies that still awards the US a pristine triple-A credit designation. Fitch in August announced that it had downgraded the US from a triple A to a double A plus, two months after the country narrowly averted a sovereign default over a fight to lift its borrowing limit. Political brinkmanship over the debt ceiling was also the reason for S&P’s credit downgrade of the sovereign in 2011.
“While the statement by Moody’s maintains the United States’ AAA rating, we disagree with the shift to a negative outlook,” said Wally Adeyemo, deputy Treasury secretary. “The American economy remains strong, and Treasury securities are the world’s pre-eminent safe and liquid asset.”
Adeyemo added that the administration had “demonstrated its commitment to fiscal sustainability, including through the more than $1tn in deficit reduction included in the June debt limit deal”, as well as president Joe Biden’s budget proposals to reduce the deficit over the next decade.
White House spokesperson Karine Jean-Pierre laid responsibility for the outlook shift to the behaviour of Republicans in Congress.
“Moody’s decision to change the US outlook is yet another consequence of Congressional Republican extremism and dysfunction,” Jean-Pierre said, who accused the party of “holding the nation’s full faith and credit hostage”.
There was little immediate market reaction to the news.