Why Scope Has Never Rated the US AAA

Dennis Shen
Updated: Aug 2, 2023, 17:35 UTC

Scope Ratings has never rated the United States AAA. Ever since the agency published AA ratings on the US in September of 2017, Scope has never rated the borrower higher than this level.

US Dollar, FX Empire

On 5 May 2023, Scope placed the AA credit ratings under review for downgrade. On 29 June, the agency’s AA rating was confirmed but a Negative Outlook assigned – underscoring the view that risks to the United States’ sovereign rating are tilted to the downside during the next 12-18 months. Here’s why:

Increasing Risk Associated With Misuse of the Debt-ceiling Amid Political Polarisation

  • The most recent US debt-limit crisis was resolved after Congress approved a last-minute suspension of the debt ceiling until 1 January 2025, avoiding technical default. But the debt limit will bind again in roughly a year and a half, following potentially highly-contested 2024 Federal elections that might further divide the nation.
  • The frequency of debt-ceiling stand-offs alongside a recurring, non-negligible possibility of temporary non-repayment during specific and severe episodes constitute unique credit vulnerabilities of the United States relative to the United States’ highly-rated sovereign peers.
  • Recurring debt-ceiling crises result in phases of debt distress for the Federal government and dependence on last-minute congressional action to ensure repayment of debt in full and on time. This raises risk over the long run and presents a structural challenge for the rating.

Long-run Governance Vulnerabilities

  • Congressional polarisation results in less deliberative legislative processes, raising political brinkmanship and impeding government capacity to address material economic and fiscal challenges.
  • Rising political polarisation interacts with debt-ceiling risk, making it more difficult to reach bipartisan solutions addressing severe crises.

Higher Than Normal Fiscal Deficits

  • Federal deficits are expected to stay higher than normal in the coming years. The general government deficit declined to 5.5% of GDP last year, down 6.1pps from the previous year, but Scope expects headline budget deficits to widen from 2023, rising to about 6.4% of GDP this year before stabilising around a 6.6% average over 2024-28 (compared with a 4.8% average during 2015-19). In the long run, ageing-related spending constitutes an added risk for the budgetary outlook.

Rising Debt Trajectory

  • After two years of declining debt ratios, the US debt trajectory is expected to begin reversing this year, with debt edging sideways to around 121.8% in 2023 before rising to nearly 133% by 2028, reflecting persistent budget deficits outweighing the favourable effects of continued economic growth and higher inflation for longer.
  • The Negative Outlook Scope assigned to the US credit rating accounts for challenges to the fiscal outlook, with wider budget deficits than pre-Covid averages alongside rising government debt. Elevated deficits raise risk during debt-ceiling crises, curtailing the space of time the Treasury has for emergency actions in meeting government spending obligations during such crises.

Economic and Banking-system Risks as the Fed Completes Its Tightening Cycle to Cool Inflation

  • Rapid tightening of funding conditions has elevated financial-system risk after an extended phase of exceptionally accommodative central-bank policies pushed asset valuations to lofty levels. Debt-service ratios are still moderate compared with their historical averages but non-financial corporate debt stood at a material 78.1% of GDP as of Q4 2022 (albeit off of Q1-2021 highs).
  • Further risks to financial stability include decreased liquidity in treasury markets resulting from quantitative tightening, driving up financial-market volatility. Vulnerabilities emerged earlier this year following the failure of several regional banks, partially reflecting regulatory shortcomings alongside the effects of rising interest rates.

External-sector Vulnerabilities

  • A current-account deficit of 3.5% of GDP in the year to Q1 2023 amid strong domestic demand for tradeable goods and despite marked pick-up in US oil and gas exports. The current-account imbalance is significantly linked to budget deficits, with the current account expected by the IMF to remain in deficit of above 2% of GDP through 2028. The net international investment liability position of the US amounted to 65% of GDP at Q1 2023, albeit off the 81% at end-2021.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Keith Mullin, Senior Editor at Scope, contributed to drafting this article.

About the Author

Dennis Shencontributor

Dennis Shen is an American economist and a Senior Director in sovereign ratings with Scope Ratings based in Berlin, Germany. At Scope, he serves furthermore as Chair of the Macroeconomic Council.

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