The last AAA rating is not guaranteed? Moodys: Regardless of who is elected president, the US fiscal situation will deteriorate

According to the financial news outlet Zhitong Finance, the rating agency Moody's stated that the fiscal situation in the United States is expected to further deteriorate, as political polarization makes it difficult for any new presidential administration to negotiate measures needed to reduce the national debt burden. The agency's report released on Tuesday stated that regardless of whether Democrat Kamala Harris or Republican Donald Trump wins the presidential election on November 5, the United States' sovereign fiscal situation may worsen.

The report mentioned, "The incoming leaders of the United States government will face deteriorating fiscal prospects, as the declining debt capacity will gradually weaken the country's fiscal strength. In the absence of policy measures that can curb these trends and help limit the fiscal deficit, the deterioration of fiscal strength will increasingly pressure the United States' sovereign credit status."

Moody's downgraded the outlook for the United States' AAA credit rating from "stable" to "negative" in November 2023. A few months ago, another rating agency, Fitch, downgraded the country's sovereign credit rating due to political brinkmanship over raising the US debt ceiling. Moody's remains the last of the three major rating agencies to maintain the highest rating for the US government. Fitch downgraded its rating from AAA to AA+ in August 2023, joining Standard & Poor's, which has maintained an AA+ rating since 2011.

Moody's stated that it is expected that the US government's fiscal deficit will account for around 7% of GDP annually over the next five years, and by 2034, the deficit ratio may rise to 9%, at which point the debt burden will increase from 97% of GDP last year to 130%.

The agency mentioned, "If meaningful policy measures are not taken to reduce the fiscal deficit, control new borrowing to cover the deficit, and slow the growth of interest expenses, the fiscal strength of the United States will significantly weaken. Without policy actions to correct this trajectory, these debt dynamics will become increasingly unsustainable and inconsistent with the Aaa rating."

Fitch stated last month that regardless of the outcome of the November election, the US fiscal situation may remain largely unchanged.

Moody's stated that a decisive factor affecting the US sovereign fiscal outlook is not only the result of the presidential election but also the composition of Congress decided in the November elections, as the balance of power in the legislative body may limit the new administration's ability to ensure the passage of legislation. Currently, there is a division in the US Congress, with Republicans controlling the House of Representatives and Democrats controlling the Senate.

Moody's mentioned, "We expect the US government to continue to be divided, hindering the new administration from implementing comprehensive fiscal reforms. Therefore, the fiscal policy proposals of the two candidates may require intense negotiations and compromises between the two parties. On the other hand, victory by either side could lead to significant policy changes, which may have broader implications for economic growth prospects and the credit status of public and private sector entities."

The report stated, "Credit risks exist in the possibility of sudden and disruptive changes in areas such as taxation, trade and investment, immigration, and climate policies."

Last month, Trump stated that the US president should have a say in the decisions of the Federal Reserve, indicating that he may break with the traditional policy of Fed independence. Moody's stated that the political influence on monetary policy decisions would be "negative" and could impact investors' confidence in the US financial markets The report states that, more broadly, the weakening of institutional strength may undermine confidence, impair the implementation of countercyclical policies, and have a negative impact on the operating environment of economic growth, financial markets, and bond issuers