Moody's Warns of Declining U.S. Fiscal Strength Amid Rising Deficits

Moody's has warned that the fiscal strength of the United States is expected to continue declining over the next several years. This assessment comes as the country faces increasing budget deficits and a growing debt burden. The credit rating agency's report highlights the deteriorating fiscal health of the U.S., which has worsened since Moody's downgraded its outlook for the U.S. in November 2023.

The agency attributes this decline to several factors, including the expansion of the budget deficit and the weakening of the debt burden capacity. The financial market uncertainty has intensified, with concerns about rising inflation and economic slowdown due to the Trump administration's decision to impose punitive tariffs on major trading partners. Moody's notes that even in the most optimistic and low-probability economic and financial scenarios, the U.S. debt burden remains significantly higher than that of other AAA-rated and high-rated sovereign nations.

Among major rating agencies, Moody's is the only one that maintains the U.S. sovereign debt rating at the highest level of AAA. However, due to the widening fiscal deficit and increased interest payments on debt, Moody's downgraded its outlook for U.S. sovereign debt at the end of 2023. The agency emphasizes that the affordability of U.S. government debt has decreased due to rising interest rates, making the role of the dollar and the U.S. public debt market in supporting the AAA rating even more crucial.

Despite these challenges, Moody's believes that the advantages of the dollar and the U.S. public debt market will continue to offset the negative impacts of the widening fiscal deficit and the weakening debt burden capacity. The agency cites factors such as sustained high tariffs, unfunded tax cuts, and significant economic tail risks that could negatively impact credit. However, these advantages are expected to continue mitigating the darkening prospects of fiscal deficits and debt burden capacity.