US Debt Anxiety Rocks Global Markets

The “slap on the face” from the international rating agency Moody’s, which downgraded the outlook for the US federal debt from “stable” to “negative,” came on November 10. The choice of date was not accidental. Analysts at Moody’s, the only remaining of the three major international rating agencies that still assigns US federal debt a prestigious triple-A rating, waited until the last minute to see the results from a new issuance of 30-year (maximum maturity) treasury bonds in the amount of $24 billion, which was scheduled for November 9, the day before Moody’s radical decision.

The results of this new attempt by the federal government to raise funds to guarantee the management and repayment of the US debt, which in November exceeded the sensational level of $33 trillion, turned out a real disaster.

The November 9 issue became the third in the fiscal week of November 6 to 10 and follows the previous two, with maturities of 3 and 10 years, that also performed “poor” and “very poor” respectively. Low demand for new US debt from both US domestic and international investors has caused government bond yields to soar to 5.022% (3 years) and 4.629% (10 years).

According to financial analysts at one of Europe’s largest banks, who spoke to Pluralia on an anonymous basis, “the 30-year bond issue turned out even more catastrophic than previous ones, as many strategic investors disdained the US offer and abandoned the purchase.” In particular, Washington was very disappointed with the position of Japan that completely abstained. Tensions between the Tokyo government, which is grappling with a worrying devaluation of the yen against the dollar, and Washington have escalated in recent weeks. The government of Fumio Kishida, whose popularity is at an all-time low, has criticized new US sanctions on the construction – with active participation of Japan – of the Russian liquefied natural gas project Arctic LNG 2. The American attack left Japan with no valuable source of energy, without harming the interests of Russia that continues to export LNG to Europe, China, and Southeast Asia.

In the absence of demand for a third consecutive treasury bond issue, the federal government in Washington has virtually pressed US banks “to the wall,” forcing US lending institutions to “absorb $4 billion, or 25% of the total issue,” when the average investment had never previously exceeded 13% of the total volume. Following the “stick,” came the “carrot” moment: the interest rate was set at 4.769%, which is the highest in history since 2016.

The combination of this information, plus the news that “the interest on the US government debt alone has exceeded one trillion dollars a year,” sent global markets into a state of fibrillation, causing anxiety and uncertainty regarding the reliability and capability of the federal government to meet its financial obligations on the US debt.

At the moment, Moody’s remains the only one of the three major rating agencies that, despite the “negative” outlook, has decided to maintain the USA at the triple-A level. Most recently, in August, Fitch announced that it had “downgraded” the US rating from AAA to AA+, while Standard & Poor’s (AA+ and negative outlook) made this move back in 2013.

Everything revolves around the US government deficit, which has grown significantly over the past year. As Moody’s analysts explained, the revision of the forecast to “negative” was associated with “increasing risks of reducing the sustainability of the American budget.” In an environment of higher interest rates and without effective fiscal policy measures to reduce government spending or increase revenue, Moody’s expects the fiscal deficit to remain very high, significantly weakening debt sustainability,” the agency wrote in its report.

In a very difficult financial and economic context, with very high central bank interest rates and growing uncertainty regarding the global economic recovery, constrained by China’s underperformance, the vision for the coming year is clouded by the ongoing war between Israel and Hamas, and Moody’s verdict was perceived as a real alarm signal by global markets.

To dispel investors’ concerns, the United States has – at least verbally – offered an olive branch to China. At his summit with Xi Jinping in San Francisco, President Joe Biden emphasized Washington’s desire to “put differences aside to promote bilateral cooperation and global development.”

For decades, US Treasury bonds, financial instruments issued by the US government to finance the national debt and support government spending, have been considered one of the safest financial securities in the world. Now the myth will be over.

Moody’s explained that the 2023 rise in treasure bonds would lead to “an increase in pre-existing pressure on US debt affordability,” while “in the absence of political activities, debt control in the United States can be expected to further decline, steadily and significantly, to a very weak level compared to other highly rated sovereign states.”

The world is worried about US debt, and the Federal Reserve is sounding the alarm about the health of the banking sector in the world’s largest economy. Recent data has revealed a full-fledged “exodus” of deposits from US lending institutions. In just three weeks, “there was an alarming $100 billion decline in deposits at US commercial banks,” Jerome Powell’s Fed said. More specifically, deposits fell from $17.38 trillion on September 27 to $17.28 trillion on October 18, 2023.

This very alarming trend coincides with the findings of a recent public opinion poll conducted by the Federal Reserve itself among financial market experts, investment strategists, and scientists, which assessed the current health status and prospects for the development of the American banking sector.

Despite the “stabilization” of the banking sector, following the problems at the beginning of the year, the majority of respondents said that, in their opinion, many threats continue to persist: “In the fall of 2023, the US banking sector stabilized after a period of acute stress earlier in the year. However, the risks of capital flight are becoming increasingly apparent, as huge amounts of deposits remain uninsured.” Small and mid-sized US banks are in a particularly vulnerable position “due to their influence of the CRE (commercial real estate) sector, which could lead to much more restrictive bank lending conditions.”

To prevent a repeat of a banking crisis similar to the March 2023 collapse of Silicon Valley Bank, Signature Bank, and Silvergate Bank, since the beginning of the fiscal year that started in October, the US Treasury has sent $28.6 billion to the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent agency created in 1933 by the US Congress to protect consumers in the US financial system. Billions of payments have raised new concerns about the possibility of a new financial crisis that has caused a wave of flight of deposits from credit institutions.

The Federal Reserve raised interest rates from near zero last March to the range of 5.25 to 5.5 percent, in an attempt to curb inflation.

This aggressive monetary tightening campaign has contributed to improving core financial yields. Despite criticism, Jeremy Powell’s policies are beginning to bring the first positive results. US consumer prices remained stable in October, compared to the previous month, despite expectations of a 0.1% rise. The annual rate fell from 3.7% in September to 3.2%, with the consensus at 3.3%. “Basic” data, i.e., cleared of the food and energy pricing component, increased by 0.2% against expectations of 0.3% growth. Compared to a year earlier, the “core” data recorded a 4% increase, following 4.1% in the previous month, which was also expected for October. Energy prices decreased by 2.5% compared to the previous month, food prices increased by 0.3%; compared to a year earlier, the energy sector remained lower by 4.5%, while the food sector rose 3.3%.