Moody’s, a ratings agency, downgraded its outlook for the U.S. government to “negative” from “stable,” citing risks to the country’s financial strength and political polarization in Congress. The agency has maintained the U.S.’s current top-notch AAA rating but has considered the possibility of a future downgrade.
Moody’s said U.S. deficits are likely to remain very high as interest rates rise and government spending increases, particularly on social programs and infrastructure.
Reasons for Moody’s downgrade
Rising interest rates: One of the main reasons Moody’s cited for the downgrade is the sharp rise in debt servicing costs. The United States is experiencing a rise in interest rates, which has a direct impact on the cost of servicing national debt.
Political polarization: Moody’s also pointed to growing political polarization in the US as a factor in its decision. This polarization is seen as a threat to the country’s ability to effectively manage its fiscal policies and address long-term debt challenges.
Large budget deficits: The US is running large budget deficits, which have led to worsening debt sustainability. This situation has raised concerns about the sustainability of the country’s fiscal path.
Debt Affordability Concerns: The combination of rising interest rates and large budget deficits has led to a decline in U.S. debt affordability. This decline is a key concern for rating agencies such as Moody’s.
The downgrade comes as the US faces a possible government shutdown as the Republican-led House of Representatives, the Democratic-led Senate and the Biden White House fail to agree before the November 18, 2023 deadline The US is also facing a looming debt crisis as the Treasury Department has warned that it will run out of money to pay its bills by December 3, 2023 unless Congress raises the borrowing limit.
The Biden administration rejected Moody’s downgrade, saying it disagreed with the move to a negative outlook and that the U.S. economy remains strong and resilient. The administration blamed the Republican Party for the downgrade, calling it a result of Republicans’ “extremism and dysfunction” and accusing them of holding the economy hostage by refusing to cooperate on funding and debt ceiling issues .
Immediately after Moody’s release, White House spokeswoman Karine Jean-Pierre said the change was “another consequence of the extremism and dysfunction of Republicans in Congress.”
“While Moody’s statement maintains the United States’ AAA rating, we disagree with the shift to a negative outlook. “The American economy remains strong and Treasury bonds are the world’s most important safe and liquid asset,” Deputy Treasury Secretary Wally Adeyemo said in a statement.
The administration has also defended its economic agenda, saying it will increase the growth, productivity and competitiveness of the U.S. economy and that this will be financed by higher taxes on the rich and corporations. The administration has called on Congress to pass its $1.75 trillion social spending and climate bill, known as the Build Back Better Act, and its $1.2 trillion bipartisan infrastructure bill, saying they are for the Recovery and the future of the USA are crucial.
A Moody’s downgrade could add to fiscal concerns, but investors expressed skepticism that it would have a material impact on the U.S. bond market, which is considered a safe haven because of its depth and liquidity.
“However, it is a reminder that the clock is ticking and markets are getting closer to realizing that we could be entering another period of drama that could ultimately lead to a government shutdown,” said Quincy Krosby, chief strategist for Global LPL Finance.
Moody’s downgrade has raised concerns and questions about the U.S.’s financial health and political stability, as well as its role and reputation in the world. The downgrade has also increased the pressure and urgency on the US government to resolve its fiscal and debt crises and implement its economic policies. The downgrade also highlighted the challenges and opportunities for the U.S. to address its long-term structural problems, such as an aging population, income inequality, climate change and global competition.
(With contributions from agencies)
