The Impact of Partisanship on US Credit Rating: How Extreme Divisiveness Could Lead to a Downgrade
Key Highlights :
The United States is one step closer to losing its last perfect credit rating after Moody’s Investors Service changed the outlook of the nation’s debt to negative on Friday. This move does not automatically mean Moody’s will downgrade America’s creditworthiness, but it increases the chances. Even the prospect of a US downgrade could hurt Americans’ investment portfolios, make it more expensive for them to borrow money, and make it more costly for the government to pay off its debts.
Moody’s cited the nation’s diminished fiscal strength, undone by extreme partisanship in Washington, as the key driver of the action. In a statement, the agency said, “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.”
Government officials expressed disagreement with the move, citing the liquidity of US Treasuries, among other factors. While Moody’s is the only one of the three major credit rating agencies to assign the United States an outstanding rating of AAA, Standard and Poor’s downgraded the United States for the first time in 2011, following the debt ceiling standoff then.
The recent debt ceiling debate, the first time in history a speaker was given the boot, and Congress’ inability to cement a replacement for weeks were also included in Moody’s negative sentiment about the government’s vulnerabilities. Without effective fiscal policy measures, the US’s fiscal deficits will remain very large, significantly weakening debt affordability.
Congress must pass a budget or stopgap-funding bill by midnight next Friday, November 17, to avoid a government shutdown. Federal agencies have as House Speaker Mike Johnson has yet to outline a path forward for avoiding this result. “In Moody’s view, such political polarization is likely to continue,” the agency said. “As a result, building political consensus around a comprehensive, credible multi-year plan to arrest and reverse widening fiscal deficits through measures that would increase government revenue or reform entitlement spending appears extremely difficult.”
US debt has long been considered by investors as the safest of safe havens, but Fitch’s recent cut, along with Moody’s warning, suggests it has lost some of its luster. If the US is downgraded, it will likely cause US Treasury yields to rise as investors see more risk in lending money to the government. US Treasuries – and particulary the 10-year US Treasury – influence all kinds of debt, from the mortgage rate for the houses Americans buy to contracts written around the world.
The extreme partisanship in Washington is a key driver of the US’s diminished fiscal strength and the potential for a downgrade. The inability of Congress to pass a budget or stopgap-funding bill and the lack of a comprehensive, credible multi-year plan to arrest and reverse widening fiscal deficits through measures that would increase government revenue or reform entitlement spending is a major factor.
If the US is downgraded, it could have serious economic consequences for Americans. It could make it more expensive for them to borrow money, hurt their investment portfolios, and make it more costly for the government to pay off its debts. It is therefore crucial for Congress to pass a budget or stopgap-funding bill to avoid a government shutdown and work in a bipartisan manner to work on a reasonable budget.
