Moody’s sends a warning to America: Your latest AAA credit rating is at risk

Moody’s sends a warning to America: Your latest AAA credit rating is at risk


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CNN

The United States is one step closer to losing its last perfect credit rating after Moody’s Investors Service changed its country’s debt outlook to negative on Friday after markets closed.

While this step does not automatically mean that it will reduce America’s creditworthiness, it does increase opportunities.

Even the possibility of a downgrade in the United States’ credit rating could hurt Americans’ investment portfolios, make it more expensive for them to borrow money, and make repaying government debt more expensive.

These effects are likely to be more painful if Moody’s eventually downgrades the US debt rating.

The country’s shrinking fiscal strength, dented by extreme partisanship in Washington, was the main driver of the action, according to a statement from Moody’s.

“In a context of rising interest rates, without effective fiscal policy measures to reduce government spending or raise revenues, Moody’s expects the U.S. fiscal deficit to remain very large, significantly impairing debt sustainability,” the statement said.

US government officials have backed away from the move, citing the liquidity of US Treasuries, among other factors.

“We disagree with the shift to a negative outlook,” Deputy Treasury Secretary Wally Adeyemo said in a statement. “The US economy remains strong, and Treasury securities are the world’s preeminent safe and liquid assets.”

Moody’s is the only one of the Big Three credit rating agencies to give the United States a premium rating of AAA, which it has maintained since 1917.

Standard & Poor’s downgraded the US rating for the first time in 2011, following the debt ceiling crisis at the time. In August, Fitch Ratings downgraded the US credit rating after the latest debate on the debt ceiling.

Moody’s cited several recent events that exemplify America’s extraordinary political division, including a default earlier this year before Congress approved an increase in the debt limit.

The resulting ouster of House Speaker Kevin McCarthy, the first time in history that a House speaker has been impeached, and the inability of Congress to confirm a replacement for weeks are among Moody’s negative sentiments about the government’s weaknesses. This is especially critical when it comes to being able to exercise fiscal responsibility, avoid another imminent shutdown, and work in a bipartisan way to operate on a reasonable budget.

If Congress does not approve the budget or temporary funding bill by midnight next Friday, November 17, the government will shut down. Federal agencies have already begun preparing as House Speaker Mike Johnson has yet to outline a path forward to avoid that outcome.

Johnson’s spokesman did not immediately respond to CNN’s request for comment on Moody’s announcement.

“In Moody’s view, this political polarization is likely to continue,” the agency said. “As a result, it appears extremely difficult to build political consensus around a comprehensive and credible multi-year plan to halt and reverse the trend of rising fiscal deficits through measures that would increase government revenues or reform entitlement spending.”

White House press secretary Karine Jean-Pierre said Modi’s actions are “yet another result of Republican extremism and dysfunction in Congress.”

Investors have long viewed US debt as the safest of the safe havens, but Fitch’s recent downgrade, coupled with Moody’s warning, suggests it has lost some of its lustre.

The rating downgrade is likely to push US Treasury yields higher as investors see more risk in lending money to the government.

US Treasuries – especially 10-year US Treasuries – affect all types of debt, from mortgage interest rates on the homes Americans buy to contracts written around the world.

Immediately after the announcement, US Treasury yields rose slightly before the bond market closed at 5pm EST ahead of the weekend.

The next step for Moody’s will be to undergo a more comprehensive review of US debt to determine whether a credit rating downgrade is warranted. Reviews are typically completed within 30 to 90 days in cases where the review is “not dependent on an event whose timing cannot be controlled by Moody’s,” a summary of the methodology published by the ratings panel said before Friday.

This story is evolving and will be updated.

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