Moody's Says Probability of Negative Outlook for U.S. Rating in Next Two Years Has Risen

by: Research Recap

The probability that Moody’s would place a negative outlook on the US rating in the next two years has risen as a result of both long-term trends and recent developments, Moody’s says in a new report

“This would be contingent on no significant deficit-reduction measures being adopted during that time. Even though the economic outlook is now looking more favorable than earlier thought—partly as a result of the recent tax package—economic growth alone will not be enough to fundamentally alter the negative trend in debt ratios. While long-term trends have always carried a risk of significant worsening in US debt metrics relative to other Aaa sovereigns, the time frame as to when this trend might affect the rating outlook has shortened.”

The new report offers no new conclusions about the outlook or the rating, but rather provides additional detail about these influences and context as to how Moody’s analysis of the US sovereign has evolved in the wake of the global financial crisis.

Moody’s concludes that over the next three years, our expectations include:

  1. Constructive efforts to reduce the current budget deficit as evidence of firmer growth becomes apparent;
  2. Constructive efforts to control the long-term growth of entitlement spending or to expand its funding;
  3. Average nominal real GDP growth in the 4-5% range;
  4. Long-term Treasury bond yields rising toward, but averaging less than, 5%.

The report includes comparisons of the US to other Aaa-rated countries on measures like government debt to revenue, interest payments to revenue, and government debt to GDP.