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Political instability could cost taxpayers if US debt rating drops

The U.S. has over $33 trillion in debt. Future debt could be more costly if U.S. political institutions don't stabilize.
Political instability could cost taxpayers if US debt rating drops
Posted at 12:31 PM, Nov 13, 2023

The U.S. credit rating is no longer considered "stable," but officials from Moody's opted to keep the nation's AAA bond rating intact. 

AAA is the best possible rating a nation can earn, but Moody's warned that if U.S. political institutions don't become more stable, the AAA bond rating could drop. Nations with AAA bond ratings mean investing in those countries comes with minimal risks. 

A lower bond rating would result in the cost of future U.S. debt increasing even more. According to the Treasury, U.S. debt has surpassed $33 billion, which is nearly double what it was a decade ago.  

Of the three major bond issuers, only Moody now lists the U.S. with a AAA bond rating. Earlier this year, Fitch relisted the credit rating to AA+. Standard and Poor's changed the U.S. credit rating from AAA to AA+ in 2011. 

Moody's said that while the U.S. has a stable economy, the current political situation adds more risk for borrowers. The announcement comes days before the U.S. government runs out of money without congressional intervention. As of Monday, there is no clear path on an agreement to keep the government funded beyond this week.

SEE MORE: What are the chances of a government shutdown?

"At a time of weakening fiscal strength, there is an increased risk that political divisions could further constrain the effectiveness of policymaking by preventing policy action that would slow the deterioration in debt affordability," Moody's said in its assessment. "These risks underscore rising political risk to the US' fiscal position and overall sovereign credit profile."

Moody's cited the removal of Rep. Kevin McCarthy as House Speaker and subsequent squabble over his replacement as an example of political instability in the U.S. 

"In Moody's view, such political polarization is likely to continue. As a result, building political consensus around a comprehensive, credible multi-year plan to arrest and reverse widening fiscal deficits through measures that would increase government revenue or reform entitlement spending appears extremely difficult," Moody's said. 

Moody's, however, has said that the U.S. economy is "resilient" as it battles inflation and political instability. It also cites that the U.S. dollar being the dominant currency in global trade helps stabilize the credit rating. 

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