U.S. Fiscal Deficit Concerns

LONDON (Reuters) – A widening U.S. fiscal deficit is a growing concern, with threats of recurring debt-ceiling standoffs and the risk of a near or technical default contributing to a negative credit rating outlook from Scope Ratings.

Europe-based rating firm Scope has graded the United States at AA with a negative outlook, planning its next review on November 22, just after a tight presidential election. According to Scope, unless the winning candidate’s party achieves majorities in both the House of Representatives and the Senate, another debt-ceiling crisis is likely by early 2025.

The U.S. budget deficit has expanded to $1.833 trillion for fiscal 2024, the highest since the COVID pandemic, as reported by the Treasury Department on Friday.

Meanwhile, the International Monetary Fund's fiscal chief noted on Wednesday that the U.S. debt path remains sustainable, with a variety of options available to control it — aided by an impressive combination of growth and easing financial conditions.

Scope acknowledges that while the U.S. benefits from being the world’s leading currency and having the largest capital markets, the escalating fiscal deficit poses significant risks.

> "It is inflationary, increases risk premiums at the longer end of the yield curve, and reduces private investment," the note stated.

Higher interest rates, despite recent cuts in policy rates, have resulted in persistent budget deficits between 6% and 8% of GDP, leading to rising interest payments that may exceed 10% of government revenue in the coming years.

Moody's lowered its outlook on the triple-A rated United States from stable to negative in November 2023, indicating further deterioration of U.S. fiscal health.

Scope also expressed concerns that a potential victory for Republican former president Donald Trump might exacerbate risks to U.S. institutions, including the rule of law, increased politicization of the judiciary, and potential challenges to Federal Reserve independence — jeopardizing the dollar's status as a global reserve currency.

> "These factors may test the market’s long-held view of the global role of the dollar, a fundamental pillar supporting the sustainability of U.S. public finances," Scope warned.