New York CNN –
The United States moved a step closer to losing its last perfect credit rating after Moody’s Investors Service changed its national debt outlook to negative after the market closed on Friday.
While this move won’t automatically lead to a worsening of America’s credit rating, it does increase the chances.
According to a statement from Moody’s, a key reason for the action was the country’s diminished financial strength, undermined by extreme partisanship in Washington.
“With higher interest rates and no effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects U.S. budget deficits to remain very high, which will significantly weaken debt affordability,” the statement said.
“We disagree with the move to a negative outlook,” Deputy Finance Minister Wally Adeyemo said in a statement. “The American economy remains strong and government bonds are the safest and most liquid asset in the world.”
Moody’s is the only one of the three major rating agencies to give the United States the excellent AAA rating since 1917.
Standard & Poor’s first downgraded the U.S. credit rating in 2011 following a debt ceiling stalemate. In August, Fitch Ratings downgraded America’s credit rating following the recent debt ceiling debate.
Moody’s cited several recent events that illustrate America’s extraordinary political divide, including the near default earlier this year before Congress agreed to raise the debt ceiling.
The resulting ouster of House Speaker Kevin McCarthy, the first time a speaker was removed from office in history, and Congress’s weeks-long inability to find a replacement also contributed to Moody’s negative assessment of the administration’s vulnerabilities. This is particularly important when it comes to the ability to assume fiscal responsibility, avoid another impending shutdown and work across party lines on a sensible budget.
“In Moody’s view, this political polarization is likely to continue,” the agency said. “As a result, it appears extremely difficult to achieve political consensus on a comprehensive, credible, multi-year plan to halt and reverse the expansion of fiscal deficits through measures to increase government revenues or reform entitlement spending.”
White House press secretary Karine Jean-Pierre said Moody’s action was “another consequence of the extremism and dysfunction of Republicans in Congress.”
US debt has long been considered the safest of safe havens by investors, but Fitch’s recent cut and Moody’s warning suggest it has lost some of its luster.
A downgrade would likely cause U.S. Treasury yields to rise as investors see greater risk in lending money to the government. As mortgage interest rates and interest rates on other loans track the movement of Treasury yields, they would rise as a result.
Immediately following the announcement, U.S. Treasury yields rose slightly before the bond market closes at 5:00 p.m. ET over the weekend.
This story is evolving and will be updated.