Moody’s Drops U.S. Ratings from Stable to Negative

On Friday of last week, Moody’s Investors Service dropped the United States government’s ratings outlook from stable to negative. The decision — Moody’s said — is because of rising risks to the country’s fiscal strength.

Or — put in different terms — polarization over stable funding for the U.S. government is driving the decision.

“Recently, multiple events have illustrated the depth of political divisions in the U.S.: Renewed debt limit brinkmanship, the first ouster of a House Speaker in U.S. history, prolonged inability of Congress to select a new House Speaker, and increased threats of another partial government shutdown,” Moody’s said.

There are also other problems.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.” Moody’s report said “Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”

Federal spending is also an issue. The deficit hit $1.7 trillion for the budget year that ended in September. That’s up from $1.38 trillion the year before. The problem with that is compounded by higher interest rates that cause issues with tax revenue being used up to pay the interest.

Not all is lost. Moody’s expects the U.S. to keep its Aaa rating and to retain its exceptional economic strength. “Further positive growth surprises over the medium term could at least slow the deterioration in debt affordability,” Moody’s said.

Deputy Secretary of the Treasury Wally Adeyemo said the U.S. Treasury disagrees with the decision.

“While the statement by Moody’s maintains the United States’ Aaa rating, we disagree with the shift to a negative outlook,” he said. “The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”

Source link: CNBC —

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