NOTE: On June 28, 2022, the press release was corrected as follows: The last sentence of the third paragraph of the press release was removed . Revised release follows.
New York, June 24, 2022 -- 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 rating affirmation is driven by Moody's view that the US 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 US' strong policy response to the pandemic supported a very swift and early recovery that avoided economic scarring and demonstrated the government's capacity to manage shocks. Moody's expects the US economy and the sovereign's credit profile to remain resilient to shocks, including the current challenges to the global economy from high and persistent inflation, tightening financial conditions, and the Russian invasion of Ukraine. 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. If materialized, those risks would exert further pressure on the US' relatively weak 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 US' 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.
The US' long-term local- and foreign-currency country ceilings remain unchanged at Aaa. The Aaa local-currency ceiling reflects a small government footprint in the economy, predictable and effective institutions, very low external imbalances and low political risks, all of which reduce the risks posed to non-government issuers by government actions or shocks that would commonly affect the government and the private sector. The foreign-currency ceiling at Aaa reflects the country's very strong policy effectiveness and open capital account which reduce transfer and convertibility risks to minimal levels.
A full list of affected ratings is provided towards the end of this press release.
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
EXCEPTIONAL CREDIT STRENGTHS COUNTERBALANCE RELATIVELY WEAKER FISCAL POSITION
The US is emerging from the pandemic with its key credit strengths intact, underpinned by a combination of exceptional economic strength, high institutions and governance strength, and extremely low exposure to government liquidity and financing risks. These credit features continue to support its Aaa rating, despite ongoing erosion in fiscal strength that has been exacerbated by the pandemic.
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 $23 trillion, 2021 nominal 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. Moody's expects the US to continue to grow at a faster pace than many high-income economies over the medium term.
The US' economic prowess is supported by high institutions and governance strength. Moody's assessment of institutional strength 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. Despite current inflationary challenges, US monetary and macroeconomic policy has demonstrated a long history of effectiveness which supports its Aaa credit profile. We expect the Federal Reserve to ultimately achieve its dual mandate, albeit through a process that could result in a more pronounced slowdown of demand in the near term. 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, including Congressional brinkmanship around the debt limit, 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 the weakest factor of the US credit profile, 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 coronavirus pandemic, cumulative fiscal deficits have driven US government debt to one of the highest levels globally and the highest level among Aaa-rated sovereigns. However, Moody's expects the phasing out of temporary government fiscal support, combined with high nominal GDP growth, to drive a significant improvement in the federal fiscal position with the deficit narrowing to about 4.3% of GDP in 2022, from a recent high of about 15% in 2020, and the debt burden declining to about 97.6% of GDP from 100% in 2020. Over the longer term, Moody's expects deficits to gradually widen to around 7% of GDP and the debt burden to rise to about 113% of GDP by 2032.
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 Moody's assessment of a reserve currency sovereign's fiscal strength. In recent years, a long-term decline in US interest rates has contributed to improved federal government interest payments-to-revenue and GDP ratios to about 8.7% and 1.6% in 2021, respectively, from about 10.8% and 1.8% in 2019. However, the US stands out as having one of the least affordable debt burdens among Aaa-rated sovereigns and G-7 countries. Over the longer term, as interest rates rise and debt levels increase, Moody's expects US debt affordability to significantly deteriorate with ratios effectively doubling, absent any material fiscal reforms.
Notwithstanding this expected gradual erosion in fiscal strength, 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 many decades, 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 59% of global foreign exchange reserves held in dollar-denominated assets at the end of 2021. Meanwhile, with total public debt outstanding of about $24 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
Although near-term risks to the US growth outlook have increased due to elevated inflation and monetary policy tightening that could be a catalyst for a recession, it is unlikely that the US' economic strength will diminish materially in the foreseeable future. While growth rates may slow to below potential in response to the Federal Reserve's tightening of monetary policy, Moody's expects the US economy to remain resilient with the underlying strength of the economy unlikely to be structurally impaired. At the same time, Moody's expects the sovereign's high institutions and governance strength to continue to support the economy's resilience to shocks and preserve key structural features of the US institutional framework through political cycles.
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 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 driven mainly by rising ageing-related entitlement spending and higher debt service payments 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 that would raise revenues or reform entitlement spending, 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
The US' ESG Credit Impact Score is neutral-to-low (CIS-2), reflecting low exposure to environmental risks, moderately negative exposure to social risks and a very strong governance profile that supports the sovereign's credit rating, resilience and capacity to respond to shocks.
The US' E issuer profile score is neutral-to-low (E-2), reflecting relatively low exposure to environmental risks across all categories, including physical climate risk, carbon transition, natural resources management, waste and pollution.
The US' S issuer profile score is moderately negative (S-3), reflecting exposure to social risks driven mainly by demographics and income inequality. Demographics pose moderately negative risks, due to an aging population and rising healthcare costs that will increase age-related entitlement spending and contribute to increased pressures on the sovereign's weakening fiscal position. If left unaddressed, relatively high and rising income inequality, along with concerns over widening wealth and opportunity disparities, could contribute to further weakening of the US fiscal position, increased political risk and social unrest.
The US' very strong institutions and governance profile supports its rating, as captured by a positive G issuer profile score (G-1), and reflects both strong institutions and demonstrated policy effectiveness.
GDP per capita (PPP basis, US$): 69,231 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 5.7% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7% (2021)
Gen. Gov. Financial Balance/GDP: -14.7% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.6% (2021) (also known as External Balance)
External debt/GDP: 90.1% (2021)
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 21 June 2022, a rating committee was called to discuss the rating 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The US' rating is Aaa, which is already at the top of Moody's rating scale. An upgrade to a higher rating is therefore not possible.
Given the stable outlook, Moody's does not anticipate downward rating pressure to emerge on the US' Aaa sovereign rating in the near term. However, Moody's would consider changing the outlook on and ultimately moving the US' rating if it were to conclude that US policymakers were unlikely to respond effectively in the coming years to the country's growing fiscal challenges through measures to raise government revenues or reform entitlement spending. On the basis of current policy settings, Moody's estimates that the federal government debt burden will remain stable until 2026 after which it will begin to gradually increase. However, debt affordability will deteriorate at a much faster rate over the next decade, driven by materially higher interest payments relative to revenue and GDP as interest rates rise. The absence of effective policy action over the coming years to mitigate these fiscal pressures would signal a further erosion in both fiscal and institutional strength. A weakening of institutions and governance, such as through deterioration in legislative and judicial effectiveness or macroeconomic policies, could put downward pressure on the rating. 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.
LIST OF AFFECTED RATINGS
..Issuer: United States of America, Government of
.... Issuer Rating, Affirmed Aaa
.... Senior Unsecured Notes, Affirmed Aaa
..Issuer: United States of America, Government of
....Outlook, Remains Stable
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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.
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
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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://ratings.moodys.com/documents/PBC_1288235.
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 https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
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Sovereign Risk Group
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Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653