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By Davide Barbuscia and Andrea Shalal
NEW YORK/WASHINGTON (Reuters) – Moody’s (NYSE:) on Friday downgraded its outlook on the U.S. credit rating to “negative” from “stable,” citing large fiscal deficits and a decline in debt affordability, a measure which generated immediate criticism from the president. Joe Biden’s administration.
The move follows a sovereign rating downgrade by another ratings agency, Fitch, this year, which came after months of brinkmanship over the U.S. debt ceiling.
Federal spending and political polarization have been a growing concern for investors, contributing to a sell-off that sent U.S. government bond prices to their lowest levels in 16 years.
“It’s hard to disagree with the reasoning, without any reasonable expectation of fiscal consolidation in the near term,” said Christopher Hodge, chief U.S. economist at Natixis. “Deficits will continue to be large…and as interest costs take up a larger proportion of the budget, the debt burden will continue to grow.”
The rating agency said in a statement that “continued political polarization” in Congress increases the risk that lawmakers will be unable to reach a consensus on a fiscal plan to curb declining debt affordability.”
“Any kind of meaningful policy response we might see to this decline in fiscal strength probably won’t happen until 2025 because of the reality of next year’s political calendar,” William Foster, senior vice president at Moody’s, told Reuters. In an interview.
Republicans, who control the U.S. House of Representatives, hope to release a stopgap spending measure on Saturday aimed at averting a partial government shutdown by keeping federal agencies open when current funding expires next Friday.
Moody’s is the last of the three major rating agencies to maintain a top rating for the U.S. government. Fitch changed its rating from triple A to AA+ in August, joining S&P, which has had an AA+ rating since 2011.
While changing its outlook, indicating that a downgrade is possible in the medium term, Moody’s affirmed its long-term issuer and senior unsecured debt ratings at ‘Aaa’, citing US economic and credit strengths.
Immediately after Moody’s publication, White House spokeswoman Karine Jean-Pierre said the change was “yet another consequence of congressional Republican extremism and dysfunction.”
“While Moody’s statement maintains the United States’ Aaa rating, we do not agree with the change to a negative outlook. “The U.S. economy remains strong and Treasury securities are the world’s leading safe and liquid asset,” Treasury Undersecretary Wally Adeyemo said in a statement.
Adeyemo said the Biden administration had demonstrated its commitment to fiscal sustainability, including through more than $1 trillion in deficit reduction measures included in a deal reached in June with Congress to raise the U.S. debt limit. , and Biden’s proposal to reduce the deficit by nearly $2.5 trillion over the next decade.
Treasury yields have soared this year on expectations that the Federal Reserve will maintain tight monetary policy, as well as fiscal concerns focused on the United States.
The sharp rise in Treasury yields “has increased pre-existing pressure on the affordability of US debt,” Moody’s said.
A Moody’s downgrade could exacerbate fiscal concerns, but investors have said they are skeptical it will have a material impact on the U.S. bond market, seen as a safe haven because of its depth and liquidity.
However, “it’s a reminder that the clock is ticking and markets are getting closer to understanding that we could enter another period of drama that could ultimately lead to a government shutdown,” said Quincy Krosby, chief global strategist at LPL Financial (NASDAQ:).
Moody’s decision also comes as Biden, who is seeking re-election in 2024, has seen his support drop sharply in the polls. A New York Times/Siena poll released Sunday showed him trailing former President Donald Trump, the Republican front-runner, in five of six battleground states: Nevada, Georgia, Arizona, Michigan and Pennsylvania. Biden was ahead of Trump in Wisconsin. The outcome in those six states will help determine who will win the presidential election.
Moody’s move will also increase pressure on congressional Republicans to move forward on funding legislation to prevent a partial government shutdown.
U.S. House Speaker Mike Johnson, who has spent days in talks with members of his slim 221-212 Republican majority over various stopgap measures, said Moody’s decision underscored the failure of what he called the Biden’s “reckless spending agenda.”
“Our $33.6 trillion debt is unsustainable and represents a danger to our national security and our economy,” he said in a statement. “We will fight to get our finances in order.”
The Democratic-led House and Senate must agree on a vehicle that Biden can sign into law before current funding expires on Nov. 17.
Infighting among House Republicans has led to flirtations with a government shutdown, but both parties have contributed to budget deficits.
Biden’s Democrats have backed a wide range of spending plans, while Republicans pushed through steep tax cuts at the start of Donald Trump’s presidency that also fueled the deficit. The United States’ total gross debt increased by approximately $7.9 trillion during Trump’s years in office. Neither party has seriously addressed the rising costs of the Social Security and Medicare programs, which account for a significant portion of federal spending.