From AAA to AAARGH! Here's Why Moody's US Credit Warning Will Accelerate Dedollarization
16:28 GMT 12.11.2023 (Updated: 19:27 GMT 12.11.2023)
© AFP 2023 / Emmanuel Dunand
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The New York City-headquartered credit rating giant lowered its outlook of America’s creditworthiness from “stable” to “negative” on Friday, citing the country’s worsening fiscal position. Sputnik reached out to veteran economist and macroeconomics specialist Dr. Sergio Rossi for his take on the implications of Moody’s move.
The White House slammed Moody’s over its threat to downgrade the US’ credit rating, with press spokeswoman Karine Jean-Pierre suggesting that the worsening outlook was “yet another consequence of congressional Republican extremism and dysfunction.”
Deputy Treasury Secretary Wally Adeyemo also challenged the decision, emphasizing that “while the statement by Moody’s maintains the United States’ AAA rating, we disagree with the shift to a negative outlook. The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset,” Adeyemo assured in a statement.
“The Biden administration has demonstrated its commitment to fiscal sustainability, including through the more than $1 trillion in deficit reduction included in the June debt limit deal as well as President Biden’s budget proposals that would reduce the deficit by nearly $2.5 trillion over the next decade,” the deputy Treasury chief added.
Moody’s decision came just hours after Treasury Secretary Janet Yellen’s meetings with Chinese counterpart He Lifeng in San Francisco on Friday ahead of the upcoming Asia-Pacific Economic Cooperation summit this coming week. Yellen, who assured recently that Washington could “certainly afford” to keep pumping tens of billions in taxpayer money to conflicts in Ukraine and Israel, has yet to comment on Moody’s decision.
11 November 2023, 09:20 GMT
Moody’s is the last of the big three international credit agencies signaling the possible downgrade of the US’ rating, with Standard and Poor’s already doing so in 2011, citing political polarization after what was then the latest debt ceiling showdown. Fitch downgraded the US to an AA+ rating in August, citing an “expected fiscal deterioration over the next three years,” and the last-minute debt deal reached in June, when the country again teetered on the brink of defaulting on its close to $33 trillion national debt. Yellen “strongly disagreed” with that decision, suggesting it was based on “outdated data.”
Sovereign credit ratings are designed to evaluate risks associated with lending money to a country, but also offer signals to financiers on the potential risks involved with investing into a country. The worse the rating, the worse the risk is perceived to be. Moody’s lowest possible rating is a C, which signals that the borrower is in default of some or all of its financial obligations.
The outlook downgrade comes as Washington heads for another shutdown deadline on November 17, with Republicans in the House of Representatives tabling a bill to continue funding the government without new appropriations for Ukraine or Israel. The White House has blasted the stopgap funding bill as an “extreme” and “unserious” proposal, with Jean-Pierre calling it “a recipe for more Republican chaos and more shutdowns – full stop.”
Just how “unserious” the House proposal is will be seen this week as lawmakers negotiate to get the stopgap funding through, with recently picked House Speaker Mike Johnson seemingly unlikely to back down on Ukraine after his predecessor, Kevin McCarthy, was ousted from the job in October over allegations of proposing “secret side deals” for additional Ukraine cash.
The Moody’s outlook shift, combined with the seemingly never-ending shutdown crisis, inflation, the fallout of the conflicts in Ukraine and the Middle East, and the growing signs of a looming US recession, are all bad news for Washington and the West in general, says Dr. Sergio Rossi, a professor of macroeconomics and monetary policy at the University of Fribourg in Switzerland.
“The situation for the US public finance is rather worrying indeed, since the US federal government has been accumulating fiscal deficits for a long period of time, and currently the economic outlook is very problematic for a number of stakeholders in this country and beyond it,” Dr. Rossi told Sputnik.
“In particular, the actual inflationary pressures on the markets for produced goods and services affect an increasing number of US households, and induce a series of negative effects on the labor market as well as for the whole banking sector, notably because a number of firms will reduce investment and could also have a series of problems to reimburse their bank debts over the short run. Another systemic crisis could thus burst before long in the United States, therefore affecting a number of Western countries negatively,” the economist warned.
Dr. Rossi believes US policy going forward, and in particular the Federal Reserve’s decisions regarding further bumps in the interest rate, will determine in part how bad a potential crisis gets.
The academic doesn’t buy into Deputy Treasury Secretary Wally Adeyemo’s assurances about the strength of the US economy and the liquidity of its debt, suggesting that US officials comments are aimed at painting “an optimistic picture” of the economy to prevent bank runs and dissuade foreign investors from dumping their US assets in a "fire sale."
“The claim that US Treasury securities are the most liquid asset in the world” is similarly “an attempt at averting foreign holders of these securities, particularly the People’s Bank of China,” from selling off these securities and halting the purchase of other US government bonds, according to Rossi.
If the latter happened, it would “make it impossible for the US government to finance its fiscal deficits over the short run, thereby reducing the dollarization of the global economy, hence giving rise to a stronger depreciation of the US dollar across foreign exchange markets – which would also increase inflationary pressures in the US economy as a result of higher costs for its imported goods,” Rossi warned.
10 November 2023, 13:27 GMT
The US government has two options for putting its government funding problem to bed, neither of them pretty as far as ordinary Americans are concerned, the economist fears.
“On the one hand, the White House could suggest a reduction in public expenditures that a number of politicians would accept, since their own private interests are not affected, particularly as these spending cuts will affect the low and middle class, thus leaving the strong powers’ interests unaffected by these austerity measures…The list of these cuts could notably include social welfare policies. On the other hand, the US government might decide to increase fiscal pressure, particularly as regards the incomes’ tax or the taxation of firms’ profits in those sectors, such as food and energy, where these profits have much increased thanks to the current geopolitical tensions in the world,” Rossi explained.
As for the timing of Moody’s decision – which came against the background of the upcoming APEC summit set to kick off on Wednesday, the professor predicted that many of the APEC’s 21-members could move to “further de-dollarize their economies and international transactions,” and reduce holdings of US debt.
“They could also reshore part of their economic activities, which were delocalized in the US economy to take advantage of its prominent position in the world, which is increasingly vanishing [due to] a series of political decisions of past and present” by US officials, which have “aggravated their country’s situation on economic and geopolitical grounds,” in Rossi’s words.
“The global economy is becoming multipolar, and the US government is trying to avert its loss of ‘soft power’ through a ‘whatever it takes strategy that, in fact, will provide more harm than benefits to the United States eventually,” Dr. Rossi summed up.
8 November 2023, 20:27 GMT
