Moodys cuts its US credit rating to “negative”- Biden Administration says no big deal.
Moody’s downgraded the US credit rating to negative from stable today.
Moody’s on Friday changed its outlook on the U.S. 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 U.S. 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 U.S. 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 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 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 U.S. credit and economic strengths.
Zerohedge says “Who could have seen this coming?”
After a disastrous 30Y bond auction this week, a collapse in Treasury market liquidity, and an accelerating rise in the market’s perception of the United States’ credit risk, Moody’s has just cut its outlook on US credit ratings to negative from stable…
…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.
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 expects federal interest payments relative to revenue and GDP to rise to around 26% and 4.5% by 2033, respectively, from 9.7% and 1.9% in 2022. These projections factor in Moody’s expectation of higher-for-longer interest rates, with the average annual 10-year Treasury yield peaking at around 4.5% in 2024 and ultimately settling at around 4% over the medium term. The debt affordability forecasts also take into account Moody’s expectations that, absent significant policy changes, the federal government will continue to run wide fiscal deficits of around 6% of GDP near term and to around 8% by 2033, the widening being driven by higher interest payments and aging-related entitlement spending.
By comparison, deficits averaged around 3.5% of GDP from 2015-2019. Such deficits will raise the US federal government’s debt burden to around 120% of GDP by 2033 from 96% in 2022. In turn, a higher debt burden will inflate the interest bill.
For a reserve currency country like the US, debt affordability – more than the debt burden – determines fiscal strength. As a result, in the absence of measures that limit the size of fiscal deficits, fiscal strength will increasingly weigh on the US’ credit profile.
The Biden Administration freaked out on the news but pretended that it was not big deal.
“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”
“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”
Biden’s massive spending at a budget kept at COVID levels has terrible consequences.
The spending leads to increased interest rates.
Increased interest rates lead to a decrease in bond values.
Decreases in bond values lead to bank failures.
Increases in rates lead to higher costs for mortgages and borrowing.
Increased costs lead to inflation and higher prices for goods.
Without comparative increases in wages and salaries, Americans can’t keep up with their bills and increased costs for things and their net worth suffers.
This leads to higher credit card debt costs and balances (the US credit card debt exceeded $1 trillion for the first time every recently und the Biden regime.)
This leads to bankruptcies and families suffering the challenges related to them.