The American agency Moody’s Investors Service changed the outlook for the rating of the United States from stable to negative on Friday. According to the Reuters agency, this was mainly due to high US fiscal deficits and internal political disagreements. The agency’s move was criticized by President Joe Biden’s administration. In this context, economist Lukáš Kovanda referred to an analysis by the Wharton Business School at the University of Pennsylvania, according to which the country has roughly twenty years to correct public finances, otherwise bankruptcy could occur.
“Continued political polarization in the US Congress increases the risk that successive governments will not be able to reach consensus on a fiscal plan that would slow the decline in debt servicing capacity,” Moody’s said in a statement.
“In a context of higher interest rates, without effective fiscal policy measures to reduce government spending or raise revenue, Moody’s expects US fiscal deficits to remain very high, significantly weakening debt servicing capacity,” the agency said.
The agency’s decision comes just a few months after another agency, Fitch, downgraded the United States’ creditworthiness rating from the highest grade of AAA to AA+. Twelve years ago, Standard & Poor’s was the first of the major agencies to withdraw the highest US rating.
Moody’s is the last of the three agencies that so far rate the creditworthiness of the US at the highest level. “Although Moody’s maintains the AAA rating of the United States in its statement, we do not agree with the change to a negative outlook. The US economy remains strong and US bonds are the safest and most liquid asset in the world,” Deputy Treasury Secretary Wally Adeyemo said in response.
The credit rating is an important guide for investors, showing them the probability of proper loan repayment. It has a significant effect on the willingness of lenders to lend to the respective state, as well as on the terms of the loan, such as the interest rate. The higher the rating, the better the borrower is perceived in the eyes of creditors and the more likely it is that he will be able to secure cheaper loans.
Economist Lukáš Kovanda recalled that according to this year’s analysis by the Wharton Business School at the University of Pennsylvania (here), the United States has roughly twenty years to fundamentally correct its public finances. “Otherwise, their situation will become unsustainable and the country will face insolvency, or bankruptcy, which would dramatically shake the whole world,” explained Kovanda.