Widening U.S. fiscal deficit a growing worry, says Scope Ratings

LONDON (Reuters) - A widening U.S. fiscal deficit is a growing concern and the threat of recurrent debt-ceiling standoffs and associated risk of a near or technical default remains a key factor behind the negative outlook for the country's credit rating, Scope Ratings said.

Europe-based rating firm Scope rates the United States AA with a negative outlook. It next reviews the rating on November 22, just over two weeks after a tight presidential election.

In the note, seen by Reuters on Thursday, Scope said unless the party of the winning candidate secures majorities in both the House of Representatives and the Senate, the United States is headed for another debt-ceiling crisis in early 2025.

The U.S. budget deficit grew to $1.833 trillion for fiscal 2024, the highest outside of the COVID era, the Treasury Department said on Friday.

The International Monetary Fund's fiscal chief meanwhile said on Wednesday the U.S. debt path is still sustainable and policymakers have many options to bring debt under control and an enviable combination of strong growth and easing financial conditions.

Scope said that while the United States benefited from the dollar's role as the world's No.1 currency and the deepest capital markets globally, the widening fiscal deficit was a concern.

"It is inflationary, increases risk premiums at the longer end of the yield curve and reduces private investment," the note said.

"Higher interest rates, despite recent policy rate cuts, combined with persistent budget deficits of 6% to 8% of GDP, result in rising interest payments, which are set to exceed 10% of government revenue over coming years."

Ratings agency Moody's, which lowered the outlook on the triple-A rated United States to "negative" from "stable" in November 2023, said last month that U.S. fiscal health was expected to deteriorate further.

Scope's note added that a win by Republican former president Donald Trump could bring an additional risk of a further weakening of U.S. institutions, including the rule of law, further politicisation of the judiciary, and a possible challenge to Federal Reserve independence - and in turn the dollar's global reserve currency status.

"These factors may test the market’s long-held view of the global role of the dollar, and thus one of the main pillars supporting the sustainability of U.S. public finances," Scope said.

(Reporting by Dhara Ranasinghe; Editing by Toby Chopra)