Rating agencies ?turn negative on US credit rating

?

Rating agencies downgraded downgraded the United States government’s credit rating, citing Federal spending and political polarization which have been a rising concern for investors, contributing to a selloff that took U.S. government bond prices to their lowest levels in 16 years.

For the second time in history Fitch Ratings the move came citing rising debt at the federal, state, and local levels and a “steady deterioration in standards of governance” over the past two decades. The rating was cut Tuesday one notch to AA+ from AAA, the highest possible rating. The new rating is still well into investment grade.

Moody's also lowered 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.

Fitch decision illustrates one way that growing political polarization and repeated Washington standoffs over spending and taxes could end up costing U.S. taxpayers. A lower credit rating, over time, could raise borrowing costs for the U.S. government.

It’s only the second time in the nation’s history that its credit rating has been cut. In 2011, the ratings agency Standard & Poor’s stripped the U.S. of its prize AAA rating after a prolonged fight over the government’s borrowing limit. The Government Accountability Office, in a 2012 report, estimated that the 2011 budget standoff raised Treasury’s borrowing costs by $1.3 billion that year. At the same time, the huge size of the U.S. economy and historic stability of the federal government has kept its borrowing costs low. Global investors often flock to U.S. Treasury securities during periods of economic turmoil, lowering the interest rate paid by the U.S. government.

Fitch had warned May 24 that it could remove the government’s triple-A rating as Congress again struggled to raise the borrowing limit. A deal was reached nearly a week later that suspended the limit and cut about $1.5 trillion from the government deficit over the next decade. Fitch cited the worsening political divisions around spending and tax policy as a key reason for its decision. It said U.S. governance has declined relative to other highly rated countries and it noted “repeated debt limit standoffs and last-minute resolutions.”

Biden administration officials strongly criticized the rating agencies’ move. Treasury Secretary Janet Yellen said it was “arbitrary” and “based on outdated data.” Yellen noted that the U.S. economy has rapidly recovered from the pandemic recession, with the unemployment rate near a half-century low and the economy expanding at a solid 2.4% annual rate in the April-June quarter.

Fitch informed Biden administration officials that the Jan. 6, 2021 insurrection was a factor in its decision to downgrade because it indicated an unstable government, according to a person familiar with the discussions between the administration and the rating agency. Fitch produced a report last year that showed government stability declined from 2018 to 2021, but increased since Biden assumed the presidency, said the person, who was granted anonymity to disclose private conversations.

Another factor in Fitch’s decision is that it expects the U.S. economy to tumble into a “mild recession” in the final three months of this year and early next year. Economists at the Federal Reserve made a similar forecast this spring but then reversed it in July and said growth would slow but a recession would likely be avoided. Moody's on Friday lowered 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.

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, told Reuters in an interview.

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.

Treasury yields have soared this year on expectations the Federal Reserve will keep monetary policy tight, as well as on U.S.-focused fiscal concerns. The sharp rise in Treasury yields "has increased pre-existing pressure on US debt affordability," Moody's said.

A Moody's downgrade could exacerbate fiscal concerns, but investors have said they are skeptical it would have a material impact on the U.S. bond market, seen as a safe haven because of its depth and liquidity.

Moody's decision also comes as Biden, who is seeking reelection in 2024, has seen his support fall sharply in the polls. A New York Times/Siena poll released on Sunday showed him trailing former President Donald Trump, the leading Republican candidate, in five of six battleground states: Nevada, Georgia, Arizona, Michigan and Pennsylvania. Biden was ahead of Trump in Wisconsin. The outcome in those six states will help determine who wins the presidential election.

The Moody's move will also heap pressure on congressional Republicans to advance funding legislation to avert a partial government shutdown.

?

The House and the Democratic-led Senate must agree on a vehicle that Biden can sign into law before current funding expires on Nov. 17. Infighting among House Republicans has led to flirtations with government shutdowns yet both parties have contributed to budget deficits.

Biden's Democrats have backed a wide range of spending plans, while Republicans pushed through sharp tax cuts early in Donald Trump's presidency that also fed the deficit. The total gross U.S. debt rose by about $7.9 trillion during Trump's years in office. Neither party has seriously addressed the rising costs of the Social Security and Medicare programs that represent a significant slice of federal spending.

?