Moody's Warns of Potential Loss of AAA Rating for U.S. Without Substantial Debt Reduction

Moody's warns that the United States could lose its sole AAA top sovereign credit rating if it does not take substantive measures to reduce debt. William Foster, Senior Vice President at Moody's, points out that the new U.S. administration must address the growing budget deficit. If not corrected, the debt situation will become unsustainable and inconsistent with an AAA rating.

Moody's is watching how the new Congress and White House will strengthen fiscal conditions after the election. Fiscal policy is key, especially in addressing the deficit issue. The U.S. federal debt stands at around $28 trillion, with the fiscal deficit consistently exceeding 6% of GDP, and net interest payments on federal debt could surpass $1 trillion annually, accounting for 3% of GDP. Resolving the debt ceiling issue is crucial for maintaining financial market stability.

Moody's expects the U.S. government to ultimately resolve the debt ceiling dispute and continue to repay debt on time and in full. The 10-year benchmark U.S. Treasury yield could rise to 4%, and if it can be maintained at 4% or lower, it will alleviate debt costs.

Moody's also notes that the Federal Reserve's independent decision-making has not been influenced by politics. U.S. trade policy may remain protectionist, driving a shift towards domestic industrial policies. Immigration policy may increase labor costs in industries reliant on foreign labor. A divided Congress may slow the transition to a low-carbon economy, but private sector, state governments, and consumer preferences will continue to drive the transition.

Last year, Moody's downgraded the outlook on the U.S. sovereign credit rating to "negative," and both S&P and Fitch also downgraded their ratings. Moody's rationale was the large fiscal deficit and declining debt affordability. The downgrade in outlook suggests a potential downgrade within the medium term, exacerbating fiscal concerns.

Sovereign Credit Rating: An assessment by rating agencies of a country's government's ability to repay debt, with AAA being the highest rating.

Fiscal Deficit: The portion of government spending that exceeds its income.

Debt Ceiling: The maximum amount of money the government is allowed to borrow, set by Congress.