Moody’s warns of downgrade to U.S. credit rating

Moody’s Investors Service Inc., one of the world’s big three global credit rating agencies, has warned of a downgrade to the United States sovereign credit rating as the nation’s federal deficit hit risky levels and it faces a potential government shutdown thanks to Congress’s failure to reach consensus on federal budget despite the economy’s better-than-expected performance.

Moody’s kept the U.S. sovereign rating at Aaa but lowered its outlook to “negative” from “stable” on Friday local time. This means even the U.S.’ last top credit rating that was assigned by the major credit rating agencies has the prospect of a downgrade.

Standard & Poor’s AB and Fitch Ratings, Inc. had previously downgraded the U.S. sovereign rating by one notch from the highest rating in August 2011 and August 2023 respectively.

Moody’s pointed to the United States’ worsening fiscal position and political polarization as the two main reasons for the downgrade. Fitch had also lowered the U.S. sovereign rating for the same reasons.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the U.S.’ fiscal deficits will remain very large, significantly weakening debt affordability,” Moody’s said in a statement.

According to the U.S. Treasury Department, the fiscal deficit of the federal government’s fiscal year 2023 between October 2022 and September 2023 increased 23 percent on year to $1.70 trillion, or 6.3 percent of U.S. gross domestic product (GDP). If the student loan forgiveness program that was struck down by the Supreme Court is excluded, the deficit is expected to reach $2.02 trillion in the fiscal year 2023, double the previous year’s figure of $1.02 trillion, Bloomberg said.

Experts are raising the alarm about the rapidly expanding deficit. The deficit is now at levels seen during major crises such as World War II, the 2008 global financial crisis, and the Covid-19 pandemic in 2020, according to Harvard University professor Jason Furman. The deficit has risen sharply as spending increased while revenues fell.

A higher interest burden from high interest rates also weighed on the outlook. Moody’s projects that debt interest payments as a percentage of revenues will increase significantly to 26 percent in 2033 from 9.7 percent in 2022. In 10 years, nearly one-third of taxes collected will be used to pay interest on borrowed money.

Moody’s expects high interest rates to persist for some time, with the 10-year U.S. Treasury bond averaging 4.5 percent in 2024 before slowly declining, reflecting an expectation that interest rates will remain high for quite some time. Moody’s also cited the legislative inability of the U.S. Congress to overcome political polarization as a key reason for the downgrade. The ratings firm said that concerns over a possible government shutdown due to the U.S. Congress missing its deadline to pass the budget bill was another factor in the outlook downgrade. “While a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of U.S. institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years,” Moody’s wrote on September 25. At the time, the Congress had passed a 45-day spending bill just before the September 30 deadline for next year’s budget.

Goldman Sachs Group, Inc., in the meantime, expected that the government shutdown would cut quarterly growth by 0.15 percentage points per week and by about 0.2 percentage points when factoring in the private sector. Meanwhile, Deputy Treasury Secretary Wally Adeyemo rebutted the downgrade, saying, “The American economy remains strong, and Treasury securities are the world’s pre-eminent safe and liquid asset.”