Moody's affirms Aaa rating for US, maintains stable outlook

The rating affirmation is driven by Moody's view that the United States is emerging from the pandemic shock with its credit strengths intact, underpinned by exceptional economic strength, high institutional and governance strength, and the unique and central roles of the US dollar and US Treasury bond market in the global financial system, which among other benefits provide extraordinary funding capacity, the rating agency said in a press note.

Risks to the US economy have materially increased and could lead to a sharper than expected slowdown, or potentially a recession, driven by increasing monetary policy tightening over the next few quarters, it noted.

If materialised, those risks would exert further pressure on the relatively weak US fiscal position. However, in Moody's view, US institutions, including the Federal Reserve, will effectively manage these challenges and the US economy will demonstrate its resilience.

The stable outlook reflects Moody's view that the diversity, dynamism, and competitiveness of the US economy, along with the US dollar's status as the preeminent international reserve currency and very large size and depth of the US Treasury market, will continue to offset rising fiscal pressures and periods of economic slowdown.

Following a sharp widening of fiscal deficits and a rise in the debt burden during the pandemic, deficit and debt ratios will improve in 2022 and 2023. However, the fiscal strength is expected to deteriorate at an increasing rate over time as higher ageing-related entitlement spending and interest payments drive persistent fiscal deficits, absent material revenue or entitlement reforms.

Diminishing confidence that US policymakers will take effective action in the coming years to reduce federal government budget deficits and the ongoing rise of the debt burden would signal erosion of both fiscal and institutional strength, which would weigh on the sovereign's credit profile.

ALCHEMPro News Desk (DS)