By Davide Barbuscia
NEW YORK (Reuters) -Ratings agency Moody’s said on Tuesday that the U.S.’ fiscal strength is on track for a continued multi-year decline as budget deficits widen and debt becomes less affordable.
The agency said in a report that the country’s fiscal health deteriorated further since Moody’s lowered its outlook on the U.S. triple-A rating in November 2023.
The report comes amid heightened uncertainty in U.S. financial markets as President Donald Trump’s decision to impose punitive tariffs on key trading partners has sparked investor fears of higher price pressures and a sharp economic slowdown.
“Even in a very positive and low probability economic and financial scenario, debt affordability remains materially weaker than for other Aaa-rated and highly rated sovereigns,” Moody’s said.
It projects debt to gross domestic product, a key ratio in assessing a country’s finances, will rise to around 130% by 2035 from nearly 100% in 2025. Debt affordability will worsen at a faster rate, with interest payments accounting for 30% of revenue by 2035 from 9% in 2021, it said.
Moody’s is the last among major ratings agencies to keep a top, triple-A rating for U.S. sovereign debt, though it lowered its outlook in late 2023 due to wider fiscal deficits and higher interest debt payments.
Fitch cut the U.S. sovereign rating by one notch to AA+ from AAA in 2023, citing fiscal deterioration and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills. It was the second major rating agency to strip the United States of its top triple-A rating, after Standard & Poor’s did so after the 2011 debt ceiling crisis.
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs.
Moody’s said on Tuesday that lower U.S. debt affordability has meant that the central role of the dollar and the Treasury market in global financial markets has become more critical in supporting the triple-A rating.
However, the potential negative economic impact of tariffs as well as the prospect of unfunded tax cuts complicates the picture.
“We see diminished prospects that these strengths will continue to offset widening fiscal deficits and declining debt affordability,” it said.
Republicans are pushing a $4.5 trillion tax cut extension, but its impact on deficits remains uncertain without major spending cuts, which could clash with Trump’s pledges to protect social programs.
