By Davide Barbuscia and Andrea Shalal
Moody’s downgrades U.S. credit rating to “negative” from “stable” due to large fiscal deficits and a decline in debt affordability, which has drawn criticism from President Joe Biden‘s administration.
The move follows a rating downgrade of the sovereign by another ratings agency, Fitch, after months of political brinkmanship around the U.S. debt ceiling.
Federal spending and political polarization have raised concern for investors, contributing to a selloff that took U.S. government bond prices to their lowest levels in 16 years.
“It is hard to disagree with the rationale, with no reasonable expectation for fiscal consolidation any time soon,” said Christopher Hodge, chief economist for the U.S. at Natixis. “Deficits will remain large … and as interest costs take up a larger share of the budget, the debt burden will continue to grow.”
The ratings agency said “continued political polarization” in Congress raises the risk that lawmakers will not be able to reach a consensus on a fiscal plan to slow the decline in debt affordability.
“Any type of significant policy response that we might be able to see to this declining fiscal strength probably wouldn’t happen until 2025 because of the reality of the political calendar next year,” William Foster, a senior vice president at Moody’s, told Reuters in an interview.
Republicans, who control the U.S. House of Representatives, expect to release a stopgap spending measure on Saturday aimed at averting a government shutdown.
Moody’s is the last of the three major rating agencies to maintain a top rating for the U.S. government. Fitch changed its rating from triple-A to AA+ in August, joining S&P which has had an AA+ rating since 2011.
While it changed its outlook, indicating a possible downgrade over the medium term, Moody’s affirmed its long-term issuer and senior unsecured ratings at ‘Aaa’ citing U.S. credit and economic strengths.
Immediately after the Moody’s release, the White House criticized the change, calling it “yet another consequence of congressional Republican extremism and dysfunction.”
Deputy Treasury Secretary Wally Adeyemo said the Biden administration had demonstrated its commitment to fiscal sustainability, including through over $1 trillion in deficit reduction measures.
Moody’s decision could exacerbate fiscal concerns, but investors are skeptical it would have a significant impact on the U.S. bond market.
“It is a reminder that the clock is ticking and the markets are moving closer and closer to understanding that we could go into another period of drama that could lead ultimately to the government shutting down,” said Quincy Krosby, chief global strategist at LPL Financial.
The Moody’s move will also increase pressure on congressional Republicans to advance funding legislation to avert a government shutdown.
U.S. House Speaker Mike Johnson said Moody’s decision underscored the failure of what he called Biden’s “reckless spending agenda.”
“Our $33.6 trillion debt is unsustainable and poses a danger to our national security and economy,” he said.
The House and the Democratic-led Senate must agree on a vehicle that Biden can sign into law before current funding expires on Nov. 17.
Infighting among House Republicans has led to flirtations with government shutdowns, yet both parties have contributed to budget deficits.
The total gross U.S. debt rose by about $7.9 trillion during Trump’s years in office. Neither party has seriously addressed the rising costs of social security and medicare.
(Reporting by Richard Rohan Francis, Davide Barbuscia, Andrea Shalal, David Morgan, Saeed Azhar and Caroline Valetkevitch; writing by Ira Iosebashvili; Editing by Megan Davies, Shilpi Majumdar, Shounak Dasgupta, David Gregorio, Chris Reese, Diane Craft and Christian Schmollinger)
