Daily Management Review

Moody's Downgrades The US Credit Rating, Infuriating Washington


Moody's Downgrades The US Credit Rating, Infuriating Washington
US President Joe Biden's administration swiftly criticised Moody's for lowering its outlook on the U.S. credit rating to "negative" from "stable" on Friday, citing significant fiscal deficits and a fall in debt affordability.
The action comes after the sovereign's rating was downgraded earlier this year by Fitch, another ratings agency, following months of political wrangling over the US debt ceiling.
Investor anxiety over federal spending and political division has increased, which has led to a selloff that has brought U.S. government bond prices to their lowest points in sixteen 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."
"Continued political polarisation" in Congress increases the likelihood that lawmakers won't be able to agree on a budget plan to prevent the deterioration in debt affordability, according to a statement from the ratings agency.
"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.
The U.S. House of Representatives, which is controlled by Republicans, is expected to unveil a stopgap spending bill on Saturday that would keep federal agencies operating after the current funding ends on Friday, perhaps preventing a partial government shutdown.
Out of the three major rating agencies, Moody's is the last one to keep the U.S. government rated at the top. at August, Fitch upgraded from triple-A to AA+, joining S&P, which has been at this rating since 2011.
Despite modifying its outlook and suggesting a potential downgrading in the medium run, Moody's maintained its 'Aaa' long-term issuer and senior unsecured ratings, citing the credit and economic strengths of the United States.
Speaking immediately upon the Moody's release, Karine Jean-Pierre, a spokesman for the White House, described the shift as "yet another consequence of congressional Republican extremism and dysfunction."
“While the statement by Moody’s maintains the United States’ Aaa rating, we disagree with the shift to a negative outlook. The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset," Deputy Treasury Secretary Wally Adeyemo said in a statement.
Adeyemo claimed that the Biden administration had proven its commitment to fiscal sustainability by proposing to cut the deficit by nearly $2.5 trillion over the next ten years and by including over $1 trillion in deficit reduction measures in a June agreement with Congress on raising the U.S. debt limit.
Treasury rates have increased dramatically this year due to concerns over U.S.-focused fiscal policy and predictions that the Federal Reserve will maintain restrictive monetary policy.
According to Moody's, "the sharp increase in Treasury yields has increased pre-existing pressure on US debt affordability."
A downgrade by Moody's might intensify budgetary worries, but investors have expressed scepticism that it would materially affect the U.S. bond market, which is seen as a safe haven due to its depth and liquidity.
But according to Quincy Krosby, chief global strategist at LPL Financial, "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 ultimately lead to the government shutting down."
Additionally, Biden's support has declined significantly in the polls as he runs for reelection in 2024, which coincides with Moody's conclusion. He was behind the front-runner Republican, former President Donald Trump, in five of the six battleground states (Nevada, Georgia, Arizona, Michigan, and Pennsylvania), according to a New York Times/Siena survey issued on Sunday. In Wisconsin, Biden led Trump in the polls. Who wins the presidential race will be influenced by the results in the six states.
In order to prevent a partial government shutdown, the Moody's action will also put further pressure on House Republicans to bring financing legislation forward.
The speaker of the US House, Mike Johnson, has been negotiating several interim solutions with members of his narrow Republican majority (221-212) for days. He claimed that Moody's decision further demonstrated the failure of Biden's "reckless spending agenda."
"Our $33.6 trillion debt is unsustainable and poses a danger to our national security and economy," he said in a statement. "We will fight to get our finances in order."
Before the current financing expires on November 17, the House and the Democratic-led Senate must reach a consensus on a bill that Biden can sign into law.
Republicans in the House have been squabbling among themselves, which has flirted with government shutdowns, but both parties have contributed to financial deficits.
Wide-ranging spending plans have been supported by Biden's Democrats, but early in Donald Trump's presidency, Republicans forced through significant tax cuts that further increased the debt. During Trump's administration, the gross national debt increased by around $7.9 trillion. The growing expenses of the Social Security and Medicare programmes, which account for a sizeable portion of federal spending, have not received any real attention from either party.