Moody’s Lowers Outlook on US Debt to Negative, Towards Fitch and S&P Global Downgrades

Rating agency Moody’s lowered its outlook on the US credit rating to “negative” from “stable”, pointing to a sharp rise in debt servicing costs with higher interest rates and “entrenched political polarization”. The move came after US markets had closed for the weekend. The move followed Fitch and S&P downgraded the US. The credit ratings agency maintained the USA’s top Aaa rating but changed its outlook to ‘negative’. Moody’s is the only of the three big credit rating agencies that still awards the US a triple-A credit designation. Moody’s move came just after the past week’s Treasury announcements on marketable debt issuance and the Quarterly Refunding statement.

Manhattan Fog

Last week we were of the belief ‘the real test comes in this coming week’s US Treasury auctions for 3s (Tuesday), 10s (Wednesday) and 30s (Thursday).’ Thursday sale was a shocker.

Recall at the prior refunding the size of its quarterly bond sales increased for the first time since early 2021 and then Fitch downgraded the US government’s credit rating from AAA to AA+. More supply, negative ratings action, and voila yields took off. We will see what Monday brings, the fact they maintained the ratings will quell some fears. We believe the move was also a nod towards the current US funding package lasts just to November 17 i.e. next Friday.

Moody’s is the only of the three big credit rating agencies that still awards the US a triple-A credit designation. Fitch in August announced that it had downgraded the US from a triple A to a double A plus, two months after the country narrowly averted a sovereign default over a fight to lift its borrowing limit. Political brinkmanship over the debt ceiling was also the reason for S&P’s credit downgrade of the sovereign in 2011.

Fitch at that time downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’ on Tuesday. The Rating Watch Negative was removed, and a Stable Outlook assigned. The Country Ceiling has been affirmed at ‘AAA’. Fitch had warned debt limit games, political brinksmanship and reduced financing flexibility would impacts United States of America at ‘AAA’.

Moody’s Conclusion on U.S. Debt

  • Downside risks to the US’ fiscal strengths have increased and may no longer be fully offset by the sovereign unique credit strengths.
  • Expects that the US’ fiscal deficits will remain very larger, significantly weakening debt affordability.
  • Sees US debt affordability to decline further, steadily and significantly, to very weak levels vs other highly rated sovereigns.
  • Political polarization in Congress raises risk successive govt not able to reach consensus on plan to slow decline in debt affordability.
  • US can carry a higher debt burden than other countries.

The sharp drastic rise in Treasury yields this year “has increased pre-existing pressure on US debt affordability”. Moody’s said “in the absence of policy action, [it] expects the US’s debt affordability to decline further, steadily and significantly, to very weak levels compared to other highly rated sovereigns”.

In addition to a steep increase in interest costs, Moody’s also highlighted political dangers — pointing to “an increased risk that political divisions could further constrain the effectiveness of policymaking by preventing policy action that would slow the deterioration in debt affordability”.

The US Congress was a shambles last month after the Republican Speaker of the House of Representatives was voted out of his role after striking a deal with Democrats to continue funding the government. This short-term deal struck then will expire in one week unless a new agreement is reached, forcing the federal government to shut down some operations and furlough some non-essential workers. A deal to avert that outcome remained a long way off on Friday.

Notably the rating agency’s change in outlook Moody’s reaffirmed the US’s triple A rating, reflecting the agency’s view “that the US’s formidable credit strengths continue to preserve the sovereign’s credit profile.”

US Administration Response

Wally Adeyemo, deputy Treasury secretary in response said “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 pre-eminent safe and liquid asset.”

Adeyemo added that the administration had “demonstrated its commitment to fiscal sustainability, including through the more than $1tn in deficit reduction included in the June debt limit deal”, as well as president Joe Biden’s budget proposals to reduce the deficit over the next decade.

White House spokesperson Karine Jean-Pierre laid responsibility for the outlook shift to the behavior of Republicans in Congress.

“Moody’s decision to change the US outlook is yet another consequence of Congressional Republican extremism and dysfunction,” Jean-Pierre said, who accused the party of “holding the nation’s full faith and credit hostage”.

Fitch Ratings Move Last Quarter:

Fitch Key Rating Drivers

  • Ratings Downgrade
  • Erosion of Governance
  • Rising General Government Deficits
  • General Government Debt to Rise
  • Medium-term Fiscal Challenges Unaddressed
  • Exceptional Strengths Support Ratings
  • Economy to Slip into Recession
  • Fed Tightening
  • ESG – Governance

Source: Moody’s

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