By Davide Barbuscia and Andrea Shalal for Reuters
The US Capitol in Washington DC Photo: SAMUEL CORUM
Moody's on Friday changed its outlook on the US credit rating to "negative" from "stable" citing large fiscal deficits and a decline in debt affordability, a move that drew immediate criticism from President Joe Biden's administration.
The move follows a rating downgrade of the sovereign by another ratings agency, Fitch, this year, which came after months of political brinkmanship around the US debt ceiling.
"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," Moody's said in a statement.
Republicans who control the US House of Representatives expect 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 US government. Fitch changed its rating from triple-A to AA+ in August, joining S&P which has had an AA+ rating since 2011.
While it changed its outlook, indicating a downgrade is possible over the medium term, Moody's affirmed its long-term issuer and senior unsecured ratings at 'Aaa' citing US credit and economic strengths.
US "institutional and governance strength is also very high, supported in particular by monetary and macroeconomic policy effectiveness," it said.
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.
Adeyemo said the Biden administration had demonstrated its commitment to fiscal sustainability, including through over $1trillion ($NZ 1.7tn) in deficit reduction measures included in a June agreement struck with Congress on raising the US debt limit, and Biden's proposal to reduce the deficit by nearly $2.5tn ($NZ4.2tn) over the next decade.
The outlook change comes at a volatile time for the bond market. Treasury yields have soared over the last few months to 16-year highs on expectations the Federal Reserve will keep monetary policy tight, as well as on U.S.-focused fiscal concerns.
The sharp rise in Treasury yields "has increased pre-existing pressure on US debt affordability," Moody's said.
Yields, which move inversely to bond prices, have reversed some of the gains in recent weeks.
"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.
Moody's decision also comes as Biden, who is seeking reelection in 2024, has seen his support fall sharply in the polls. A New York Times/Siena poll released on Sunday showed him trailing former President Donald Trump, the leading Republican candidate, 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 wins the presidential election.
The Moody's move will also heap pressure on congressional Republicans to advance funding legislation to avert a partial government shutdown.
US House Speaker Mike Johnson has spent days in talks with members of his slim 221-212 Republican majority about several stopgap measures. The House and the Democratic-led Senate must agree on a vehicle that Biden can sign into law before current funding expires on 17 November.
"Moody's just downgraded our credit rating outlook to negative because of our out-of-control government spending and deficits," hardline Republican Representative Andy Harris said on X, formerly known as Twitter.
"We cannot, in good conscience, continue writing blank checks to our federal government knowing that our children and grandchildren will be responsible for the largest debt in American history," he said.
- This article was first published on Reuters