First it was Standard & Poor's, then it was Fitch. Now Moody's has become the third credit rating agency to express concerns about the U.S.'s fiscal responsibility.
On Nov. 10, Moody's lowered its outlook on the U.S. credit rating from "stable" to "negative," citing concerns about the county's fiscal deficits and declining debt affordability. The move came only slightly over three months after Fitch lowered the U.S. credit rating from AAA to AA+.
"What these rating agencies are really saying is that the path the U.S. is on is unsustainable and going in the wrong direction," commented Steve Wyett, BOK Financial® chief investment strategist.
In Moody's case, the decision is "just a change to their outlook. They did not put our debt on credit watch with negative implications, so no action by Moody's is imminent, based upon this," he continued. This means that, unlike Standard & Poor's and Fitch, Moody's didn't downgrade the U.S.'s credit rating, which still remains at AAA in Moody's ratings system.
Still, Moody's announcement is "another shot across the bows for U.S. policy makers," said Peter Tibbles, senior vice president of foreign exchange for BOK Financial. "Higher interest rates without any effective fiscal policy measures to either reduce government spending or to increase revenues will mean that U.S. fiscal deficits will remain very high. This was the main contributing factor to the agency's decision along with partisan gridlock in Washington."
The latest black mark against the U.S.'s fiscal responsibility came just a week before Congress's Nov. 17 deadline for averting a federal government shutdown. As of Moody's announcement, no agreement had been reached so the potential for shutdown still loomed.
A look back at Fitch's downgrade
When Fitch downgraded the U.S.'s credit a notch in August, the agency said the decision "reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions."
"Those are just factual statements," Wyett said. "If you look at the pace that the U.S. government is adding debt, particularly as we came through the pandemic, it's increasing at a rate that is mathematically a bad position to be in."
Impact on global borrowing
The U.S.'s AA+ credit rating from Fitch and Standard & Poor's could make it more expensive for the country to borrow money, Tibbles noted.
"Some investment vehicles can only buy AAA paper. Now that some investors cannot buy certain U.S. Treasuries, that means that some demand has gone," he said. "That tells me that the U.S. is going to be paying higher interest rates on future issuance for their debt."
That will increase the amount of interest the government pays on the national debt, which will also impact the federal government's budget, Wyett said. Interest expenses totaled 10% of federal spending for the 2023 fiscal year, as of Aug. 30, according to USAspending.gov. "If you're throwing higher credit risk on top of higher interest risk, it's a detriment to your fiscal budget," he continued.
Fitch's decision also could increase borrowing costs for borrowers around the globe, Wyett noted.
"U.S. Treasuries are considered to be the safest, most creditworthy asset class out there. Everything other than that has some additional measure of risk to it, so if Treasuries move higher in risk, then every other asset class moves higher in risk as well," he explained.
"Ultimately, it could make it more expensive for emerging markets to borrow money, as many emerging markets countries peg the value of their currency to the dollar. China does that, too."
Fitch's move marked the second time the U.S. credit rating has been downgraded. In 2011, Standard & Poor's also downgraded it from AAA to AA+. "They've never raised it back," Wyett said. "For both Fitch and S&P to raise it, they would have to see improvements in our annual budgeting process, reductions in our debt-to-GDP ratios and that our political system is working more closely together," Wyett said.
It will take "more political teamwork" in Congress for the U.S. to receive a AAA rating again from those agencies, Tibbles agreed. "Congress has got to start thinking about ways of, if not reducing the debt, then certainly cutting back the pace at which we're adding to it. Both parties have got to do something to alleviate that."
Wyett noted the U.S. likely will have to both raise taxes and cut spending in order for the nation to slow the pace that it's accumulating debt.
"Our fiscal situation is not dire," Wyett said. "We're not going to default on our debt. But the longer the current situation goes on, the more difficult the problem will be to solve because the spread between spending and revenue will just keep getting wider and wider, which will just make it harder and harder to get on the right path."