Moody’s downgrades US debt rating outlook to negative

Moody's has downgraded its outlook on US debt to negative from stable, one week before crucial budget negotiations in Congress.

For now, the agency has maintained its AAA rating on US government debt.

"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's fiscal deficits will remain very large, significantly weakening debt affordability," the agency said on Friday.

The US Treasury immediately voiced its disagreement with Moody's decision.

"The American economy remains strong, and Treasury securities are the world's preeminent safe and liquid asset," Deputy Secretary of the Treasury Wally Adeyemo in a statement.

"The Biden 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."

The US budget deficit, published last month for the 2023 fiscal year ending September 30, has widened to $1.7 trillion.

Due to interest rate hikes by the US central bank to curb inflation, the cost of debt for the United States has ballooned, with Washington paying $162 billion more for interest in the last fiscal year compared to 2022.

"Continued political polarisation"

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.

Federal spending and political polarization have been a rising concern for investors, contributing to a selloff that took US government bond prices to their lowest levels in 16 years.

The ratings agency said in a statement that "continued political polarization" in Congress raises the risk that lawmakers will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability."

"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," William Foster, a senior vice president at Moody's, said.

Moody's is the only major agency to maintain its rating for US sovereign debt at its highest level - underscoring the potential economic danger to the United States of failing to reach an agreement to keep the government funded in one week's time.

Neither the Democratic-controlled Senate nor the Republican-led House of Representatives has passed a bill to extend government funding, which expires at midnight next Friday into Saturday.

Without an agreement by November 17, the world's largest economy would enter a so-called government shutdown.