Ratings agency Moody’s said U.S. financial health could deteriorate further as political polarization makes it difficult for any new presidential administration to negotiate the measures needed to reduce the national debt burden.
The agency said in a statement Tuesday that the U.S. sovereign financial profile could weaken under either Democrat Kamala Harris or Republican Donald Trump in the Nov. 5 presidential election.
“The incoming administration will face a deterioration in the U.S. fiscal outlook as declining credit stability gradually weakens U.S. fiscal strength,” the report said. “In the absence of policy measures to curb these trends and help curb the fiscal deficit, a deterioration in fiscal strength will further weigh on the US sovereign debt profile.”
Moody’s downgraded its U.S. Triple-A credit rating outlook to “negative” from “stable” in November 2023.
It comes months after another ratings agency, Fitch, downgraded the sovereign’s credit rating following a political dispute over raising the US debt ceiling.
Moody’s is the last of the three major rating agencies to maintain a top rating for the US government. Fitch upgraded its rating from Triple-A to AA+ in August 2023, joining S&P, which has held an AA+ rating since 2011.
Moody’s said the US government will run fiscal deficits equal to 7% of GDP annually over the next five years, and deficits will rise to 9% in 2034, bringing a debt burden of 130% of GDP. Last year it increased by 97%.
“Absent substantial policy action to reduce fiscal deficits, US fiscal strength will weaken, reducing new borrowing to finance those deficits, and increasing interest spending, which consumes an ever-larger share of government revenue.” He said.
“These credit dynamics are increasingly unsustainable and inconsistent with an Aaa rating.
Fitch said last month that the U.S. financial profile would remain largely unchanged regardless of who wins in November.
Composition of Congress
A decisive factor for the US sovereign fiscal outlook is not only the outcome of the presidential race, but also the composition of Congress determined by the November elections, as the balance of power in the Legislature can limit an administration’s incoming ability. Act, Moody’s said.
Congress is currently divided, with the House of Representatives narrowly controlled by Republicans and the Senate by Democrats.
“We expect the U.S. government to remain divided, barring major fiscal reforms from the new administration. As a result, both candidates’ fiscal policy proposals will require intense bipartisan negotiations and compromises,” Moody’s said.
On the other hand, a potential victory for either party could lead to substantial policy changes that could have far-reaching effects on economic growth prospects and the credit profile of public and private sector entities.
“Credit risks include the potential for sharp and disruptive changes in finance, trade and investment, immigration and climate policies, among other areas,” he said.
Trump said last month that U.S. presidents should have a say in decisions made by the Federal Reserve, signaling that he may break with traditional principles of central bank independence.
Moody’s said political influence on monetary policy decisions could be “credit negative” and affect investor confidence in US financial markets.
And more generally, “the erosion of institutional strength undermines confidence and undermines the implementation of counter-cyclical policies, negatively affecting growth, financial markets and the operating environment of lenders,” he said.
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