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Moody's cuts U.S outlook to negative

America
 Moody's Investors Service Inc signage is displayed outside of the company's headquarters in New York, U.S. [Getty Images]

Rating agency Moody's Investors Service on Friday downgraded its outlook on the U.S government to "negative" from "stable," citing the rising risks to the nation's large fiscal deficits and declining debt affordability.

"Continued political polarization within U.S. 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, as Congress faces the looming threat of a government shutdown once again.

"In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody's expected that the U.S. fiscal deficits will remain very large, significantly weakening debt affordability," it said.

Moody's has affirmed the long-term issuer and senior unsecured ratings of the U.S. at Aaa, making it the only one of the three major credit rating agencies to maintain a triple-A rating on the world's largest economy.

Following months of political brinkmanship over the U.S. debt ceiling, Fitch cut the U.S. long-term foreign currency issuer default rating to AA+ from AAA in August, joining S&P which has had an AA+ rating since 2011.

Moody's warned of "downside risks" because of a rising budget deficit with no apparent plan to rein in the deficit at a time of significantly higher interest rates from the Federal Reserve.

The agency cited a string of recent red flags, including brinkmanship over the debt limit, the ouster of the House speaker and rising threats of another government shutdown.

The Republican-controlled House of Representatives is now under pressure to take a stopgap spending measure aimed at averting a partial government shutdown.

"In Moody's view, such political polarization is likely to continue," the firm said, making it increasingly difficult for lawmakers to "reverse widening federal deficits."

According to official data published last month, the U.S. federal government recorded a budget deficit of nearly 1.7 trillion U.S. dollars in fiscal year 2023, which ended in September, up 23.2 percent from the previous fiscal year.

This adds to America's already ballooning federal debt, which recently exceeded a staggering 33.6 trillion dollars.

The federal deficit grew significantly more last year than expected due to rising borrowing costs and declining tax revenues, according to an analysis from the Congressional Budget Office.

Immediately after Moody's release, both the U.S. Treasury and White House officials said they disagreed with the shift in the outlook by Moody's.

White House spokesperson Karine Jean-Pierre said the outlook change was "yet another consequence of congressional Republican extremism and dysfunction."

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

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