Moody’s downgrades US credit rating outlook to ‘negative’, Biden administration blames Republicans

Moody’s, a credit rating agency, has downgraded its outlook on the US government from ‘stable’ to ‘negative’, citing the risks to the nation’s fiscal strength and the political polarization in Congress. The agency has maintained the US’s current top-grade AAA rating, but has raised the possibility that it may be cut in the future.
Moody’s said that the US’s deficits are likely to remain very large, as interest rates rise and the government spending increases, especially on social programs and infrastructure.
Reasons for Moody’s downgrade
Rising interest rates: One of the primary reasons cited by Moody’s for the downgrade is the sharp rise in debt servicing costs. The US has been experiencing an increase in interest rates, which directly impacts the cost of servicing national debt.
Political polarization: Moody’s also pointed to the growing political polarization in the US as a factor in its decision. This polarization is seen as a risk to the country’s ability to manage its fiscal policy effectively and address long-term debt challenges.
Large fiscal deficits: The US has been running large fiscal deficits, which have contributed to a decline in debt affordability. This situation has raised concerns about the sustainability of the country’s fiscal path.
Debt affordability concerns: The combination of rising interest rates and large fiscal deficits has led to a decline in the affordability of US debt. This decline is a key concern for credit rating agencies like Moody’s.
The downgrade comes at a time when the US is facing a potential government shutdown, as the Republican-led House, the Democratic-led Senate, and the Biden White House have failed to agree on a funding bill before the deadline of November 18, 2023. The US is also facing a looming debt ceiling crisis, as the Treasury Department has warned that it will run out of money to pay its bills by December 3, 2023, unless Congress raises the borrowing limit.
The Biden administration has rejected the Moody’s downgrade, saying that it disagrees with the shift to a negative outlook and that the US economy remains strong and resilient. The administration has blamed the Republican Party for the downgrade, calling it a consequence of the Republican “extremism and dysfunction” and accusing them of holding the economy hostage by refusing to cooperate on the funding and debt ceiling issues.
Immediately after the Moody’s release, White House spokesperson Karine Jean-Pierre said the change was “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.
The administration has also defended its economic agenda, saying that it will boost the growth, productivity, and competitiveness of the US economy, and that it will be paid for by raising taxes on the wealthy and corporations. The administration has urged Congress to pass its $1.75 trillion social spending and climate bill, known as the Build Back Better Act, and its $1.2 trillion bipartisan infrastructure bill, saying that they are critical for the recovery and the future of the US.
A Moody’s downgrade could exacerbate fiscal concerns, but investors have said they are skeptical it would have a material impact on the US bond market, seen as a safe haven because of its depth and liquidity.
However, “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 lead ultimately to the government shutting down,” said Quincy Krosby, chief global strategist at LPL Financial.
The Moody’s downgrade has raised concerns and questions about the fiscal health and the political stability of the US, as well as its role and reputation in the world. The downgrade has also added pressure and urgency on the US government to resolve its budget and debt impasses, and to implement its economic policies. The downgrade has also highlighted the challenges and opportunities for the US to address its long-term structural issues, such as the aging population, the income inequality, the climate change, and the global competition.
(With inputs from agencies)