A threat looms over the United States. With a growing debt and an increasingly heavy burden on its budgets, the various rating agencies are warning of a great danger for its economy and its obligations. In this sense, Fitch already reduced its “rating” last year due to the idea of a growing and uncontrolled national responsibility, a measure that has a direct impact on the American economy itself, since it affects the ease and quality of credit on the nation and its companies. This Tuesday, Moody’s, which had opted for a downgrade of its outlook and not notable, by maintaining its AAA rating, has sent a serious warning to the White House.
“The debt dynamics are increasingly sustainable and incompatible with a AAA rating if measures are not taken to correct the situation.” The company explained that the administration of The United States is approaching an era of growing deficits as the cost of debt stagnates in their budgets. “The administration’s fiscal and spending policies will affect the size of future budget deficits and the expected decline in U.S. fiscal strength, which could have a significant effect on the country’s sovereign credit profile,” the analysts said.
In this sense, for Moody’s, the trend will not be set by the elections in any case, since last November they expected “a US government that remains divided.” Consequently, “the fiscal policy proposals of both candidates will probably be will require intense negotiations and bipartisan compromises“Finally, it seems complicated to think that these negotiations coincide with drastic budgetary adjustments aimed at lightening the debt burden.
This direct threat of a rating downgrade is very serious for the American economy. Ellie Perlman, CEO of Blue Lake Capital, explains that a downgrade has a direct impact on the country’s economy on several fronts. First, “leads to increased borrowing costs consumers and businesses by causing a deterioration in government bonds.” It also affects “the strength of the dollar” and other factors such as “loss of investor confidence, changes in foreign investment” and a direct increase in the cost of debt.
If Moody’s takes the step suggested by Moody’s, it will follow the example that Fitch already took in August 2023, respectively. The former justified the move from triple A to AA+ by noting a “budgetary deterioration due to debt.” In its latest report, last August, it said that everything remains the same. “Large deficits will persist, the government has reached 8.8% in 2023 and, even if will be reduced to 8.1% of GDP in 2024the interest burden will continue to rise given the rising debt and high interest rates.” A year ago, after hearing the news from Fitch, which preceded significant increases in the yield on the 10-year US bond, which climbed above 4%, breaking the downward trend at the time, S&P Global maintained its rating, at AA+, which it has not budged from since it downgraded it in 2011.
Growing public debt and a permanent deficit scenario are two warning signs that remain on for a long time. The total approach of the American government now amounts to $35.3 billion. Torsten Sløk, chief economist at Apollo, lamented in his September report that “the United States spends $3 billion a day just on interest on its debt.” These are historic figures that have allowed the White House, for example, to spend more on interest ($870 billion) than on defense ($822 billion).
Uncontrollable debt
For its part, the American Congressional Budget Committee (CBO, for its acronym), a non-partisan office responsible for overseeing the country’s accounting, has not stopped in its warnings: “The deficit for fiscal year 2024 is projected to reach 7% of GDP, which will be higher than all but five years since 1946. Those five years followed historic financial crises.” In addition, “net interest costs are projected to increase from $658 billion in 2023 to $892 billion this yearalready more than $1 trillion in 2025. By 2034, net interest costs will exceed $1.7 trillion.
Last July, Goldman Sachs released a report titled “U.S. Debt Sustainability: An Uncertain Fiscal Future.” Candice Tse, an analyst at the firm, explained that “when American voters go to the polls in November, they should US Gross Federal Debt Surpasses $35 Trillion. This record figure exceeds the size of the country’s economy and is more than double the level of debt in 2014. There is no clear sign that this worrying trajectory will change.
“We do not expect any significant improvement in the trajectory of US debt or deficits over the medium term”
Still, he believes that the “great strength of the U.S. economy” and the dollar’s role as the world’s reserve currency give it “significant fiscal flexibility.” But he believes this trend is dangerous.Emphasis on fiscal sustainability has diminished in Washington over the past few decades overall, and remains low today.
In July, JP Morgan agreed, saying that “we do not expect a significant improvement in the trajectory of US debt or deficits over the medium term.” However, “The monetary authorities have maintained their credibility, Investor demand for U.S. Treasury assets remains strong and the tax base is solid. “But, despite all this, they are already starting to warn about the implications that this shift in U.S. debt has for investors.” enough to consider adding non-U.S. dollar assets and “real assets.”
