Growing debt and gradual dedollarization pose growing risks to the US sovereign rating

A Future Divided Government Could Be Key to Tighter Budget Control

What matters for policymaking is the composition of the next government and the next Congress. Further fiscal easing after 2025 is likely if the same party wins the presidency and controls Congress. This assumes a greater propensity to spend on the part of a second Trump administration than the historical preferences of previous Republican administrations. A second Biden presidency, accompanied by a Democratic-led Congress, would also likely result in additional government spending. In contrast, divided government would likely ensure that fiscal controls are comparatively tighter.

Whatever policies are adopted, the issue of fiscal sustainability will remain politically charged due to the question of the return of the debt ceiling shortly after the elections.

Status of U.S. Treasuries as a Global Safe Asset Could Be Tested by Election Outcome

To be sure, the United States continues to enjoy the greatest debt tolerance of any borrower in the world – sovereign or non-sovereign – a byproduct of the dollar-based global order, Treasuries American representing the world’s safe asset and the Federal Reserve, the world’s leading central bank.

As a result, the United States benefits from increased economic and financial resilience and safe-haven capital inflows during shocks, leading to lower rather than higher U.S. Treasury yields during crises, thereby supporting financing American throughout the cycle. The reputation of U.S. Treasuries reduces the federal government’s borrowing rate by about 25 basis points, according to some estimates.

Although the status of Treasuries as a risk-free global asset reduces any risk to debt sustainability in the short to medium term, in an increasingly multipolar world, the greater supply needed to finance the deficit could coincide with a slowdown in global demand for Treasury bonds. and increase the risk premium paid by the government. Some foreign investors, particularly those from the “South”, are diversifying their risk exposure while large economies such as China and Russia promote their own currencies. Sanctions against Russia after the escalation of its war in Ukraine have also accelerated this dedollarization, even if it remains gradual.

Longer term, Treasuries’ status as a global benchmark risk-free asset will likely also be affected by the outcome of this year’s elections. The scenario of a second Trump presidency could lead to a more confrontational approach by the United States to trade relations and accelerate dedollarization. Global reserves held in dollars fell to 59% at the end of the first Trump presidency, from 65% previously. Any further reduction in the dollar’s share of allocated reserves from the 58% at the end of 2023 would result in a parallel shift from Treasuries to other safe assets.

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Dennis Shen is Senior Director of Sovereign and Public Sector Ratings at Scope…