DBRS Morningstar Confirms the United States at AAA, Stable Trend

DBRS, Inc. (DBRS Morningstar) confirmed the United States of America’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA. In addition, DBRS Morningstar confirmed the United States of America’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS

The rating action concludes the “Under Review with Negative Implications” for all U.S. ratings. The confirmation reflects 1) the signing of the Fiscal Responsibility Act (FRA) of 2023 into law on June 3rd, thereby enabling Treasury to pay the federal government’s obligations on time, and 2) our assessment that credit risk stemming from future debt ceiling negotiations remains very low. The AAA ratings reflect the United States’ considerable credit strengths, including the scale, diversification, and resilience of the U.S. economy, the strength of the country’s governing institutions, and the reserve currency status of the U.S. dollar. Nevertheless, we continue to monitor how political polarization could adversely impact U.S. credit fundamentals over time.

The rating action follows passage of the FRA, which removed any near-term threat of payment delays or default and has enabled the Treasury to pay the federal government’s obligations on time. The budgetary effects of the legislation are modestly positive. The Congressional Budget Office (CBO) projects that the FRA will reduce budget deficits cumulatively by $1.5 trillion from 2023 to 2033. The FRA also pushes the next debt ceiling negotiation out past the 2024 elections, when the political landscape may not be conducive to a similar episode of brinksmanship. The bill passed the House of Representatives and the Senate with bipartisan support and was signed by President Biden on June 3, two days ahead of when Secretary Yellen estimated that Treasury would run out of cash to pay its bills.

It is also our assessment that credit risk stemming from debt ceiling negotiations remains very low. Past standoffs over the debt ceiling show that when control of Congress is divided and policy priorities have diverged significantly, there are few incentives for either political party to compromise well ahead of the X-date. However, as the X-date approaches, the high cost of inaction puts increasing pressure on legislators to reach a last-minute agreement. Moreover, if Congress fails to lift the debt ceiling in a timely manner, we expect that Treasury would prioritize debt payments in order to avoid a sovereign debt default. Disclosures from the Federal Reserve regarding contingency planning during previous debt ceiling episodes support this view. The willingness to postpone raising the debt ceiling and weaken the Treasury’s cash position will continue to raise some level of concern. However, our analysis suggests that policymakers clearly recognize the high financial and political cost of failing to act before the X-date. Based on this assessment, we do not anticipate putting the U.S. ratings “Under Review” in the run up to the X-date during future debt ceiling negotiations.

The AAA ratings are underpinned by United States’ strong credit fundamentals. The U.S. economy is exceptionally large, highly productive and diversified, and a global leader in innovation and research. The country benefits from well-established democratic institutions, a strong legal system, and transparent governance. In addition, U.S. financial markets and the U.S. dollar are at the center of world trade and capital flows, which provides the U.S. with an unusually high degree of financing flexibility.

However, two interrelated challenges could impact U.S. credit fundamentals over time. Political polarization could have an adverse impact on the quality and predictability of policymaking. This, in turn, could complicate efforts to address the country’s challenging fiscal outlook. According to the CBO, the federal deficit is projected to hover around 5-6% of GDP from 2023 to 2030 (including the effects of the FRA). Given the cyclical strength of the economy, the deficits appear structural in nature. If policymakers are unable or unwilling to address the government’s sizable fiscal imbalance over the medium term, public debt metrics will likely continue to deteriorate, potentially damaging the country’s growth prospects and resilience to shocks.

CREDIT RATING DRIVERS

The ratings could be downgraded due to one or a combination of the following factors: (1) a failure to reduce projected fiscal deficits over the medium term, (2) a material deterioration in economic and financial resilience, or (3) a failure by Congress to lift the debt ceiling thereby forcing the Treasury to materially delay non-debt payments.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/417851.

Notes:
All figures are in USD unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (August 29, 2022) https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

The primary sources of information used for this credit rating include U.S. Department of Treasury, Federal Reserve Board, Congressional Budget Office, Office of Management and Budget, Bureau of Economic Analysis, Bureau of Labor Statistics, Bank for International Settlements, International Monetary Fund, World Bank, S&P Corelogic, and Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

DBRS Morningstar did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this issuer took place on May 25, 2023.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Michael Heydt, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: September 8, 2011

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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