Moody’s joins Fitch and lowers its outlook on America’s credit rating

Moody’s lowered its US credit rating outlook to “negative” from “stable” citing a large fiscal deficit and low debt sustainability, a move that immediately drew criticism from President Joe Biden’s administration.

This came after Fitch lowered the sovereign rating this year, a step that came after a bitter political debate that lasted for months over the US debt ceiling.

Federal spending and political polarization were growing concerns for investors, contributing to a sell-off that pushed US government bond prices to their lowest levels in 16 years.

“It is difficult to disagree with this logic, with no reasonable expectations for financial consolidation any time soon,” said Christopher Hodge, chief economist at Natixis. The deficit will remain large…and with interest costs taking up a larger share of the budget, the debt burden will continue to increase.”

“Continued political polarization” in Congress increases the risk that lawmakers will be unable to reach consensus on a fiscal plan to slow the decline in debt sustainability, Moody’s said in a statement.

“Any kind of significant policy response that we might be able to see to this decline in financial strength probably won’t happen until 2025 because of the reality of next year’s political calendar,” Moody’s Senior Vice President William Foster said in an interview with Reuters.

Partial government shutdown:

Republicans, who control the House of Representatives, are expected to issue a temporary spending measure on Saturday aimed at avoiding a partial government shutdown by keeping federal agencies open when current funding expires next Friday.

While Moody’s changed its outlook indicating the possibility of a downgrade in the medium term, the agency maintained the long-term credit rating and the unsecured rating at “Aaa”, attributing this to the credit and economic strengths of the United States.

Immediately after Moody’s issued her statement, White House spokeswoman Karine Jean-Pierre said that the change “was another result of the extremism of Republican representatives and their failure to do their job in Congress.”

“While Moody’s statement maintains the US rating at AAA, we disagree with changing the outlook to negative,” Deputy Treasury Secretary Wally Adeyemo said in a statement. The American economy is still strong.”

Moody’s decision also comes at a time when the support rate for Biden, who is seeking re-election in 2024, has witnessed a sharp decline, according to opinion polls.

Moody’s move will also increase pressure on Republicans in Congress to move forward with funding legislation to avoid a partial government shutdown.

Moody’s had warned – at the end of last September – of the risk of closure threatening government institutions, and that it would have a negative impact on the credit rating.

Moody’s said at the time that the potential closure highlights the weakness of institutional strength and governance in the United States, and considered that a prolonged closure would lead to the disruption of the American economy and financial markets.

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