Scope places US AA credit rating under review for downgrade

Scope Ratings has on Tuesday placed the United States’ AA long-term credit ratings under review for a possible downgrade, citing growing concerns over political brinkmanship surrounding the federal debt ceiling and long-term fiscal challenges.

Scope, which is seen as the leading European credit rating agency, said  the decision reflects heightened risk from the recurrent misuse of the debt ceiling, increasing political polarisation, and persistently large fiscal deficits.

“… repetition of such severe episodes raises risk in the long run. Such acute risk during the most severe debt-limit crises might be incompatible in the long run with risks characteristic of an AA-rated borrower.” Scope said in its statement.

While Scope maintains that a technical default remains unlikely, it warned that the US government’s reliance on last-minute congressional action to meet debt obligations is a structural vulnerability that distinguishes it from other highly rated sovereigns.

Key Triggers for Possible Downgrade

Scope said a downgrade could occur if the ongoing review concludes that debt-ceiling risks have materially increased, particularly under current polarised political conditions and widening fiscal deficits.

However, the rating could be affirmed if lawmakers manage to prevent technical default and enact reforms that reduce long-term debt-limit risk — such as the removal or replacement of the ceiling with an alternative fiscal safeguard.

Deepening Fiscal and Governance Concerns

The review comes amid a divided US government following the 2022 midterm elections, which saw the House flip to Republican control, complicating efforts to pass debt-ceiling legislation. The Treasury hit its $31.4 trillion borrowing limit in January 2023 and has since relied on emergency measures to manage cash flows. The so-called “X-date,” when those funds run out, is estimated to fall between early June and the third quarter.

Adding to the pressure, Scope flagged rising governance risks and long-term challenges including:

• High and rising federal debt, with debt-to-GDP expected to reach 135 per cent by 2028.
• Structural budget deficits averaging 7 per cent of GDP over the next five years.
• Financial system vulnerabilities following recent bank failures and tightening liquidity.
• A growing current-account deficit and external liabilities.

Underlying Strengths Still Supportive

Despite these challenges, Scope acknowledged the US’ enduring credit strengths — a diversified and resilient economy, the dollar’s global reserve currency status, and the Federal Reserve’s role as a credible, independent central bank.

Still, the agency noted that each debt-ceiling standoff “brings … avoidable financial-market instability and modest damage to the market for US debt securities,” reinforcing the urgency of structural reform.

Attribution: Amwal Al Ghad English