Moody’s lowers US credit rating outlook to ‘negative’: What does it mean?

Why has Moody’s changed the US credit outlook?

There are three main reasons for this: the threat posed by rising interest rates; a mounting debt burden; and a polarised Congress that has been failing to agree on ways to tackle America’s budget deficit.

“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 said in a statement. “Continued political polarisation 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.”

In an interview with Reuters, William Foster, a senior vice president at Moody’s, said: “Any type of significant policy response that we might be able to see to this declining fiscal strength probably wouldn’t happen until 2025 because of the reality of the political calendar next year”.

Notably, the firm’s decision has come at a time when the federal government is on the brink of a shutdown next week if Republicans and Democrats in Congress can’t agree on a spending plan.

How has the Biden administration reacted?

The White House has blamed the Republican Party for the move. Press Secretary Karine Jean-Pierre in a statement said, “Moody’s decision to change the US outlook is yet another consequence of Congressional Republican extremism and dysfunction”.

Meanwhile, Deputy Treasury Secretary Wally Adeyemo criticised Moody’s, saying the administration has “demonstrated its commitment to fiscal sustainability, including through the more than $1 trillion in deficit reduction included in the June debt limit deal as well as President Biden’s budget proposals that would reduce the deficit by nearly $2.5 trillion over the next decade.”

How has the Republican Party responded?

Republican US House Speaker Mike Johnson said Moody’s decision underscored the failure of what he called President Biden’s “reckless spending agenda.”

“Our $33.6 trillion debt is unsustainable and poses a danger to our national security and economy,” he said in a statement. “We will fight to get our finances in order.”

Have other rating firms also changed their outlook?

Yes, they have. In August this year, another credit rating firm, Fitch, downgraded its US long-term rating to AA+ from its top mark of AAA. The move came two months after the country narrowly avoided defaulting on its debt.

In 2011, Standard & Poor’s made a similar move following an 11th-hour showdown over raising the debt ceiling.

What do these ratings mean?

Credit ratings agencies rate on a scale the financials and business models of companies, as well as economic management by sovereign governments, after analysing official and other data and interacting with government officials, business leaders, and economists. These agencies then rate instruments such as bonds, debentures, commercial papers, deposits, and other debt offerings of companies or governments to help investors make informed decisions.

From a company’s or a government’s perspective, a better rating helps raise funds at a cheaper rate. The agencies do this on a continuous basis, either upgrading or downgrading the instrument based on performance, prospects, or events likely to have an impact on the balance sheet of a company or on the fiscal position of a government or a sub-sovereign entity.

(With inputs from The New York Times and Reuters)