Moody’s changes US credit outlook to negative from stable on large fiscal deficits

The ratings agency also cites weakening debt affordability amid sharp rise in Treasury bond yields

The skyline of Manhattan, New York. Moody's affirmed the US’s long-term issuer and senior unsecured ratings at “Aaa”, citing credit and economic strengths. AFP

Ratings agency Moody’s on Friday lowered its outlook on US credit ratings to negative from stable, citing the country’s “very large” fiscal deficits and weakening debt affordability.

The agency, however, affirmed the US’s long-term issuer and senior unsecured ratings at “Aaa”, citing credit and economic strengths.

The downside risks to the US’s fiscal strength have increased and may no longer be fully offset by the sovereign’s unique credit strengths, according to Moody’s.

“Continued political polarisation within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,” the agency said.

The move follows a rating downgrade of the US by another agency, Fitch, in August this year, which criticised the country’s ballooning fiscal deficits and an “erosion of governance” that led to repeated debt limit clashes over the past two decades.

Fitch cut the US one level from AAA to AA+, joining S&P which has had an AA+ rating since 2011.

Moody’s is the last of the three major rating agencies to maintain a top rating for the US government.

The US economy soared in the third quarter this year as consumer spending remained strong.

Gross domestic product grew at an annualised rate of 4.9 per cent from July to September, sharply up from 2.1 per cent in the previous quarter, a preliminary estimate from the Commerce Department showed last month.

The Commerce Department said third-quarter growth “reflected accelerations in consumer spending, private inventory investment, and federal government spending and upturns in exports and residential fixed investment”.

President Joe Biden credited his economic agenda – which he calls “Bidenomics” – for the strong economic activity.

Moody’s expects the US, which has the world’s largest economy, to retain its exceptional economic strength, it said in a statement on Friday.

Second, the US’s institutional and governance strength is also very high, supported in particular by monetary and macroeconomic policy effectiveness, the statement added.

“Finally, the unique and central roles of the US dollar and Treasury bond market in the global financial system provide extraordinary funding capacity and significantly reduce the risk of a sudden spiralling of funding costs, which is particularly relevant in the context of high debt levels and weakening debt affordability,” the agency added.

However, the sharp rise in US Treasury bond yields this year has increased pressure on US debt affordability, according to Moody’s.

In the absence of policy action, Moody’s said it expects the US’s debt affordability to decline further, steadily and significantly, to very weak levels compared to other highly-rated sovereigns.

In the absence of significant policy changes, the federal government will also continue to run wide fiscal deficits of around 6 per cent of gross domestic product near term and to around 8 per cent by 2033, the widening being driven by higher interest payments and ageing-related entitlement spending, Moody’s estimated.

In comparison, deficits averaged around 3.5 per cent of GDP from 2015-2019. Such deficits will raise the US federal government’s debt burden to around 120 per cent of GDP by 2033 from 96 per cent in 2022, the agency forecast.

“There is 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 ratings agency said.

“These risks underscore rising political risk to the US’s fiscal position and overall sovereign credit profile.

“Building political consensus around a comprehensive, credible multiyear plan to arrest and reverse widening fiscal deficits through measures that would increase government revenue or reform entitlement spending appears extremely difficult.”

The US rating would face downwards pressure if policymakers were unlikely to respond to the country’s growing fiscal challenges over the medium term, through measures to increase government revenue or structurally reduce spending to slow the deterioration in debt affordability, Moody’s warned.