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Rating Action:

Moody's affirms United States' Aaa rating; maintains stable outlook

19 Jun 2020

New York, June 19, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government of United States of America's (US) Aaa long-term issuer and senior unsecured ratings. The outlook remains stable.

The affirmation of the US' Aaa rating is underpinned by the US' 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. While the coronavirus pandemic has created unprecedented challenges for the US economy and exacerbated the pace of deterioration of the government's fiscal position, Moody's expects the US economy to recover over time and the sovereign's credit profile to remain resilient to the shock. Together, these features currently counterbalance the US' relatively lower and weakening fiscal strength.

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. However, the US' fiscal strength is deteriorating and that deterioration is expected to accelerate over time as higher ageing-related entitlement spending, debt service payments and relatively weaker government revenues drive persistent fiscal deficits. 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.

The US' long-term country ceilings for local- and foreign-currency bond and bank deposits remain unchanged at Aaa. Its short-term country ceilings for foreign-currency bonds and bank deposits remain unchanged at Prime-1.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING

EXCEPTIONAL ECONOMIC STRENGTH, HIGH INSTITUTIONS AND GOVERNANCE STRENGTH, AND VERY LOW EXPOSURE TO CREDIT RELATED SHOCKS OFFSET LOWER FISCAL STRENGTH

In Moody's view, the US' combination of exceptional economic strength, high institutions and governance strength, and extremely low exposure to credit-related shocks continue to support its Aaa rating, despite ongoing erosion in fiscal strength.

The US is the world's largest economy and center of global trade and finance, supported by flexible markets and open trade and financial regimes. The country's exceptional economic strength is underpinned by the sheer scale (about $21 trillion, 2019 GDP) and diversification of its economy, its demonstrated resilience to shocks, and the unique role that it plays globally. Over time, comparatively rapid productivity growth, a high degree of technological innovation and economic dynamism have reinforced the US economy's competitiveness and contributed to growth rates that outpace those of many high-income countries. Although productivity growth has slowed since the global financial crisis and labor input is now likely to increase at a much slower pace than in previous decades, Moody's expects the US to continue to grow at a faster pace than many high-income economies over the medium term, after the temporary negative shock from the coronavirus pandemic has passed.

The US' economic prowess is supported by high institutions and governance strength. Moody's assessment of institutional strength, which it considers a governance factor under its ESG framework, takes into account structural institutional features and experience of policymaking over the medium term which are relatively insensitive to events over a short period, including over the course of an administration. Seen through that lens, the US has strong and independent institutions, robust challenge and scrutiny functions derived from the constitutional separation of powers, a vibrant civil society and an effective judiciary, and high levels of transparency. However, while the strength of the US' monetary and macroeconomic policy effectiveness supports its Aaa credit profile, other aspects of US policymaking are less robust than in many Aaa-rated peers, particularly with regards to fiscal policy. This is reflected in Moody's weaker assessment of the quality of legislative and executive institutions and of fiscal policy effectiveness. Given experience of policymaking in recent years, it is increasingly questionable whether US legislative and executive branches will undertake the pronounced shift in policy that will be required to address rising fiscal pressures.

Fiscal strength is of a lower order but still high relative to the Moody's rated universe of sovereigns. As a result of interventions to support the financial system and economy during the global financial crisis and the resulting recession, over the past decade cumulative fiscal deficits have driven the US federal government debt to one of the highest levels globally and the highest level among Aaa-rated sovereigns. The deep economic shock from the coronavirus pandemic has exacerbated this trend. Moody's assessment of the US' fiscal strength incorporates the expectation of a sharp widening of federal government deficits to about 18% and 11% of GDP in 2020 and 2021, respectively, driven largely by emergency fiscal stimulus measures in response to the pandemic. Over the longer term, Moody's expects deficits to narrow to around 7% of GDP by 2030. Wider deficits will in turn contribute to a higher federal debt burden, which Moody's expects to rise to just above 120% of GDP by 2030 from about 79% in 2019, assuming no policy correction.

However, due to the global dominance of the dollar as a reserve currency, Moody's considers the US to have significantly higher capacity to carry a larger debt burden than other sovereigns globally. Debt affordability, as measured by interest payments relative to revenue and GDP, assumes a greater importance in our assessment of a reserve currency sovereign's fiscal strength. Even here, with federal government interest payments-to-revenue and GDP of about 11% and 1.8% in 2019, the US stands out as having one of the least affordable debt burdens among Aaa-rated sovereigns and G-7 countries. However, given the long-term decline in US interest rates, deficit financing will be less costly than in the past. Over the longer term, despite lower interest rates, Moody's expects US debt affordability to deteriorate, driven mainly by relatively weaker government revenue generation due to the Tax Cuts and Jobs Act of 2017, higher average levels of unemployment, and higher debt accumulation. Moody's also expects the gradual normalization of interest rates to contribute to this dynamic over time.

Notwithstanding the gradual erosion in fiscal strength and weaker-than-peers policymaking institutions, the US' exposure to event risk, and in particular to financing shocks, is extremely low given the unique roles of the US dollar and US Treasury bond market in the global financial system. Moving forward, these strengths will assume an ever-greater significance in the preservation of the US' Aaa credit profile.

The strength of the US economy has, over the course of the twentieth century, helped the US establish and maintain the dominant positions of its currency and financial markets in the global financial system. Today, the US dollar is the world's preeminent reserve currency, with around 60% of global foreign exchange reserves held in dollar-denominated assets. Meanwhile, with total public debt outstanding of about $20 trillion, the US Treasury bond market is by far the deepest and most liquid government securities market in the world. A significant proportion of US Treasuries are held by non-residents, reflecting their preeminent safe-haven status. The global benchmark roles of the US dollar and US Treasury market insulates the US economy, bond market, and financial system from many downside sovereign risks. In particular, they remove all but the most extreme liquidity risks from the US government securities market, despite a rising debt burden, and largely eliminate government liquidity and balance-of-payment risks.

RATIONALE FOR THE STABLE OUTLOOK

It is very unlikely that the US' economic strength will diminish materially in the foreseeable future. Even if the rate of growth continues its secular decline, the economy's other attributes will continue to support overall economic strength. The economy's relatively quick recovery from the global financial crisis illustrated its resilience to a very severe shock. Moody's expects the US economy to demonstrate the same resilience following the very deep shock from the coronavirus pandemic, with the underlying strength of the economy unlikely to be structurally impaired. While US economic strength is not immune to the risk of gradual erosion, as suggested by declining growth potential and perhaps by a drift away from open trade and foreign labor, Moody's expects it to remain a highly supportive feature of the country's credit profile for many years to come.

Similarly, there is no near-term prospect of the benchmark status of the US dollar and US Treasury market being undermined. Their global safe-haven status was reinforced during the global financial crisis and again during the current coronavirus pandemic. While the US Treasury market experiences rises and falls in yields, the likelihood of sharp yield spikes that signal prolonged liquidity pressures is far below that which tends to be experienced by other sovereigns with similar fiscal characteristics.

These continuing strengths offset the ongoing erosion of the US' fiscal strength. Looking ahead over the next decade, the US faces adverse fiscal dynamics due to rising ageing-related entitlement spending, higher debt service payments, and relatively weaker government revenues that will drive persistent fiscal deficits. The US has sufficient capacity to increase revenues, given that taxes as a share of GDP are relatively low compared to peers. However, while there is ample scope to increase government revenues to shrink or eliminate deficits in future years, Moody's believes that there is far less willingness to do so. As a result, Moody's current baseline forecast is that in the absence of a shift in policy the sovereign's debt burden and debt affordability metrics will continue to weaken, resulting in a gradual but persistent decline in overall fiscal strength over the coming decade.

For now, these risks are balanced, supporting the stable outlook. Nonetheless, the US' credit profile will not remain immune to downward rating pressures in the absence of shifts in fiscal policy in the coming years to reduce the government's fiscal deficit and stabilize its debt burden.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are not material to US' credit profile in the near term. Over the longer term, more frequent natural disasters, which have exerted short-term, localized disruptions on economic activity, and have at times had significant fiscal costs, could have a greater impact on the credit profile. However, the economy's very large size and diversification, and the strength of US institutions, provide significant capacity to absorb climate-related shocks.

Social considerations are material to the US' credit profile. An aging population will increase age-related entitlement spending over the medium term, contributing to increased fiscal pressures and a likely widening of government budget deficits. High and rising income inequality, along with concerns over widening wealth and opportunity disparities, could contribute to further weakening of the government's fiscal position and to increased political risk. The coronavirus outbreak, with its substantial implications for public health and safety, may also heighten the focus on the quality of and access to healthcare in the US, with negative fiscal consequences.

Governance considerations relevant to the US' credit profile are captured in our assessment of its institutional and governance strength. While that assessment has weakened somewhat in recent years, it remains high relative to global sovereigns, supported by strong government effectiveness and rule of law, which rank very highly in international surveys. The US' demonstrated capacity to effectively manage and absorb shocks also supports this assessment.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

Moody's would consider changing the outlook on and ultimately moving the US' rating if it were to conclude that US policymakers will not respond effectively to the increasing challenges posed by the country's adverse fiscal dynamics in the coming years. On the basis of current policy settings, Moody's estimates that the federal government debt burden and interest payments-to-revenue will rise materially over the next decade. The absence of effective policy action over the coming years to arrest such a rise would signal a further erosion in both fiscal and institutional strength. Such an outcome would weigh on the sovereign credit profile, particularly if it were to reduce confidence that the US dollar and US Treasury bond market will retain their unique and central roles in the global financial system.

GDP per capita (PPP basis, US$): 65,112 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.3% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.3% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -5.9% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.3% (2019 Actual) (also known as External Balance)

External debt/GDP: 87.1% (2019 Actual)

Economic resiliency: aa1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 16 June 2020, a rating committee was called to discuss the ratings of the United States of America, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: United States of America, Government of

.... Issuer Rating, Affirmed Aaa

....Senior Unsecured Notes, Affirmed Aaa

Outlook Actions:

..Issuer: United States of America, Government of

....Outlook, Remains Stable

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William Foster
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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