By LONDON (Reuters) – A Republican sweep in the U.S. elections puts rating agency Morningstar DBRS “more on alert” regarding the country’s fiscal accounts, managing director for global sovereign ratings Nichola James told Reuters on Thursday.
Republicans’ lock on power in Washington next year will allow President-elect Donald Trump to pursue an aggressive agenda of tax cuts for businesses, workers and retirees that will test his party’s often-aired goal of reining in the government’s $35 trillion in debt.
“We were expecting that there would be some checks and balances that would prevent some of the policies that could be perceived as creating even more fiscal pressures. But that’s now not the case,” James told Reuters.
U.S. Treasury yields have risen on expectations that Trump’s policies will add further pressure to an already elevated U.S. budget deficit and stoke inflation.
But for now, James added that factors such as the size of its economy and the dollar’s status as a reserve currency should continue to buffer the U.S. credit rating.
DBRS holds a more positive view on the U.S. than larger rating agencies, rating it AAA — the highest possible rating — with a stable outlook.
Moody’s (NYSE:MCO) AAA U.S. rating however has a negative outlook.
If European countries needed to raise defence spending, it would lead to “extremely difficult choices in other public expenditures and in taxation,” James said.
Trump’s election has raised questions around whether U.S. support for Ukraine will continue and if Europe will face more pressure to meet NATO’s 2% of output military spending target.
Countries like Italy and Belgium, which already face pressures on their public finances and are falling short of the 2% target, would be vulnerable, James added.
James said reform of Germany’s debt brake was a “possibility”.
Friedrich Merz, leader of Germany’s Christian Democrats, who are likely to lead the next government, said on Wednesday he could be open to reforming the debt brake.
While there are other, longer-term policy options for Germany to avoid changing its debt brake, the next 6-12 months are critical to Germany’s economy, James said.
“If things escalate in relation to Europe’s security situation, there might not be time,” James said, adding this could make debt brake reform more likely.