Scope Ratings Issues Warning on U.S. Budget Deficit and Debt Ceiling Risks

Scope Ratings, a credit rating agency, has highlighted that the growing budget deficit in the United States and the recurring debt ceiling debates pose risks that contribute to a negative outlook for the country's credit rating. The European-based agency rates the United States at AA with a negative outlook, which is set to be reviewed on November 22 after the presidential election. It was noted that the budget deficit reached $1.833 trillion in the 2024 fiscal year, marking the highest level outside of the COVID periods.

The International Monetary Fund (IMF) mentioned that the U.S. debt path remains sustainable and that fiscal policies have various options to manage the situation. It was emphasized that America is benefiting from a rare combination of strong growth and favorable financial conditions.

Scope Ratings pointed out that despite having the world's deepest capital markets and the dollar's role as the primary global currency, the increasing budget deficit in the U.S. is worrisome. The agency noted that fiscal deficits are fueling inflation, increasing risk premiums at the long end of the yield curve, and reducing private investment. High-interest rates, combined with persistent budget deficits, are expected to strain government revenues, with interest payments projected to exceed 10% of income in the coming years.

In November 2023, Moody's also changed the U.S. credit rating outlook from "stable" to "negative," predicting further deterioration in the country's fiscal health. Scope's report highlighted potential risks such as the rule of law in U.S. institutions, judicial politicization, and the weakening of Federal Reserve independence, particularly if former President Donald Trump is reelected. These issues could affect the dollar's status as a global reserve currency.

The Scope Ratings report noted that the dollar's global role has long been seen as a key pillar of market confidence in the sustainability of U.S. public finances. However, the aforementioned risk factors might challenge this perception. The report emphasized the importance of U.S. fiscal policies in maintaining economic and financial stability and stressed the need for careful monitoring of future developments.

The debt ceiling crisis in the U.S. is expected to resurface in early 2025. Scope Ratings suggested, "If the President's party fails to secure a majority in both the House of Representatives and the Senate post-election, the country could face this crisis once again." In this context, the development of effective strategies to balance fiscal health and maintain the credit rating is crucial for the U.S.