Moody's downgraded the outlook for the US credit rating from "stable" to "negative", citing a large budget deficit, reduced debt availability and "entrenched political polarization". He writes about it Financial Times.
The rating agency said that the change in the forecast reflects the growing risks of a decline in the financial stability of the United States, which "can no longer be fully compensated by the unique credit power of a sovereign state."
The agency added that "absent policy action, [it] expects US debt affordability to continue to decline, steadily and significantly, to very weak levels relative to other highly rated sovereigns."
The Federal Reserve raised interest rates from near zero last March to a range of 5,25-5,5% in an attempt to curb inflation.
In addition to the sharp increase in interest costs, Moody's also highlighted political dangers, pointing to "an increased risk that political differences could further limit the effectiveness of policy-making, preventing action that would slow the deterioration of debt affordability."
Federal spending and political polarization are fueling growing investor anxiety, fueling a selloff that sent U.S. government bond prices to their lowest level in 16 years.
“It's hard to disagree with this rationale, as there are no reasonable expectations of fiscal consolidation in the near future. The deficit will remain large… and as interest costs take up a larger share of the budget, the debt burden will continue to grow.” — said Christopher Hodge, chief US economist at investment bank Natixis.
A change in the rating agency's forecast may, although not always, precede a credit rating downgrade. On Friday, Moody's affirmed the U.S. rating at AAA, reflecting the agency's view "that the enormous creditworthiness of the U.S. continues to preserve the country's credit profile."
The US disagrees with Moody's decision
"Although the Moody's agency maintains the US rating at the AAA level, we do not agree with the shift in the forecast to the negative side. The U.S. economy remains strong, and Treasuries are the world's greatest safe and liquid asset.", - said Deputy Minister of Finance Wally Adeyemo.
Adeyemo added that the administration "demonstrated its commitment to financial stability, including by reducing the deficit by more than $1 trillion included in the June debt limit agreement", as well as President Joe Biden's budget proposals to reduce the deficit over the next decade.
The representative of the White House, Karin Jean-Pierre, placed responsibility for the change in the forecast for the behavior of Republicans in Congress.
"Moody's decision to change the US forecast is another consequence of the extremism and dysfunction of Republicans in Congress", Jean-Pierre said, accusing the party of being "holds national recognition and trust hostage."
What are the implications of Moody's decision
A Moody's downgrade could exacerbate the financial woes, but investors said they were skeptical that it would have much of an impact on the U.S. bond market, which is considered a safe haven because of its depth and liquidity.
However, "it's a reminder that time is running out and markets are getting closer and closer to understanding that we may be entering a new period of drama that could ultimately lead to a government shutdown." said Quincy Crosby, chief global strategist at LPL Financial.
The US Congress was plunged into chaos last month after the Republican speaker of the House of Representatives was removed from office after striking a deal with Democrats to continue funding the government.
However, the then-short-term deal will expire in a week, on November 17, unless a new deal is reached, forcing the government to halt some activities and lay off some non-essential workers. An agreement to prevent such an outcome remained far from being reached on Friday.
Moody's decision puts pressure on Republicans in Congress to push a funding bill to avert a partial government shutdown.
U.S. House Speaker Mike Johnson, who spent days negotiating with members of his slim Republican majority on several stopgap measures, said Moody's decision underscored the failure of what he called Biden's "reckless spending program."
“Our $33,6 trillion debt is unsustainable and a danger to our national security and economy. We will fight to get our finances in order." he said in a statement.
In early August, US President Joe Biden signed a law suspending the $31,4 trillion national debt ceiling until January 1, 2025. This allowed the United States to avoid the first default in the country's history.
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