The US credit rating has been given another 'red light'.
On November 10th Eastern Time, the international rating agency Moody's announced that it would adjust the outlook for the United States' sovereign credit rating from "stable" to "negative", but still maintain its highest rating at Aaa.
The downside risks to the US fiscal strength have increased, "Moody's said in its rating report, expressing concerns about the US fiscal situation and debt outlook. Due to the fact that the United States has already lost the highest ratings of the other two of the three major international rating agencies, this also means that the United States is facing the threat of losing its last highest credit rating.
According to media reports, Moody's rating outlook adjustment has sparked dissatisfaction from the US government. Vice Secretary of the Treasury, Wally Adeyemo, stated that although Moody's maintained the United States' Aaa rating, the Treasury did not agree with its decision to shift its outlook towards a negative one. Adeyemo emphasized that the US economy remains strong, and US bonds are the safest and most liquid asset in the world.
Financial situation and debt outlook raise concerns
Regarding the reasons for adjusting the rating outlook, Moody's stated that the downward risks faced by the US fiscal strength have increased. Against the backdrop of rising interest rates, if effective fiscal policy measures are not taken to reduce government spending or increase revenue, Moody's expects the US fiscal deficit to remain very large, greatly weakening its debt burden.
Moody's predicts that by 2033, the proportion of US federal interest to fiscal revenue and GDP will increase from 9.7% and 1.9% in 2022 to approximately 26% and 4.5%, respectively. These predictions take into account expectations for higher long-term interest rates, with the 10-year US Treasury yield averaging around 4.5% in 2024 and ultimately stabilizing at around 4% in the medium term.
If there are no major policy changes, the federal government's fiscal deficit will continue to expand in the short term, accounting for approximately 6% of GDP and reaching around 8% by 2033. By 2033, these deficits will increase the debt burden of the US federal government from 96% of GDP in 2022 to around 120%, "Moody's said.
Regarding the reasons listed by Moody's, Christopher Hodge, Chief Economist of France's Foreign Trade Bank in the United States, said: "It is difficult to disagree with this reason because there is no reasonable expectation of fiscal consolidation in the short term. As the proportion of interest costs in the budget increases, the debt burden will continue to increase
In addition, in the rating outlook report, Moody's also expressed concerns about the political divide between the two parties in the US Congress. Moody's stated that the ongoing political polarization within the US Congress has increased the risk that successive governments are unable to reach consensus on fiscal plans to alleviate the decline in debt burden capacity.
It is worth mentioning that the timing of Moody's adjustment of the US rating outlook this time is also quite "delicate". Previously, there was a fierce game between the two parties in the US Congress over financial appropriations for the new fiscal year. To avoid a government shutdown, the US Congress passed a short-term spending bill at the last minute to provide funding for the US government until November 17th. As the expiration date of the existing short-term fiscal plan approaches, the risk of the US government "shutting down" has once again increased.
The US Congress has a week to pass a spending bill to avoid a government shutdown. However, there is currently no clear direction forward. Even if the government avoids a shutdown next week, the risk of a shutdown in the coming months will continue to exist, "said Nancy Vanden Houten, the US chief economist at the Oxford Institute of Economics, in a comment email to reporters.
US rating may lose all "3A" ratings
In fact, Moody's is not the first rating agency to question the US fiscal strength. In August of this year, Fitch announced a downgrade of the default rating of long-term foreign currency issuers in the United States from AAA to AA+.
At that time, Fitch said that the downgrade of the US rating reflected the expected fiscal deterioration over the next three years, the overall high and growing government debt burden, and the erosion of US governance over the past 20 years compared to other countries with "AA" and "AAA" ratings.
Standard&Poor's downgraded the US rating from its highest AAA rating to AA+as early as 2011. As of now, among the three major rating companies worldwide, only Moody's maintains the highest rating (Aaa) for US credit. Although Moody's changed its outlook, it still confirmed its rating as Aaa based on US credit and economic strength.
Analysts believe that Moody's adjustment of the US rating outlook to negative has "sounded an alarm bell" for the US government's financial situation, and whether the US rating will be truly downgraded in the future remains to be seen.
From the perspective of market performance, after Moody's released its rating outlook report, the yield of multi term US bonds has jumped to varying degrees. Among them, the yield of the US two-year treasury bond bond rose to 5.07%, the yield of the US three-year bond rose to 4.84%, the yield of the US five-year bond rose to 4.68%, and the yield of the US 10-year bond hit a new intraday high of 4.656%.