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The United States could face a debt downgrade in coming years if lawmakers in Washington don't make meaningful changes to the path of America's projected debt pile, according to Morningstar DBRS Senior Vice President Michael Heydt.
"The key concern we have relates to the fiscal outlook," said Heydt in an interview. "We have been clear that the ratings could be downgraded if federal debt to GDP breaches 110% without a credible commitment to to improve the debt outlook."
That would include reforms that change the trajectory of mandatory spending and/or some durable increase in revenues, he said. "Not one-off measures, but kind of more structural reforms to the public finances outlook."
They key issue is not the 110% debt to GDP level but the unsustainable trajectory of its growth, Heydt added. '"If there is a major reform that does improve the outlook substantially and it passes 110 but stabilizes, we're okay with that. That's not as much of a concern."
DEBT CLIMBING
Still, federal debt held by the public, which excludes intragovernmental debt, crossed a major threshold in early 2026, climbing above 101% of GDP, meaning that the public debt alone is now larger than the entire U.S. economy.
The Congressional Budget Office expects debt to GDP to rise above 110% in 2032. "It's not far off," Heydt said about the level, noting it could come even earlier. (See: MNI INTERVIEW: Ex-CBO Chief Says Yields Will Likely Rise More)
Morningstar DBRS is the only one of the four largest global credit rating agencies to retain the U.S. at the highest AAA rating, and confirmed that rating last week. Moody’s Ratings downgraded the U.S. credit rating in May last year from Aaa, its highest rating, to Aa1, a tier below, citing the inability of the nation to address large and growing deficits. Standard & Poor’s and Fitch downgraded the United States in 2011 and 2023, respectively.
Heightened political polarization raises the risk that lawmakers may continue to delay the reforms needed to put the country’s public finances on a more sustainable path. Still, Heydt said he anticipates intensifying political pressure for change in coming years, particularly as the Social Security trust fund is projected to run out in 2032, when benefits could be cut by about 22%.
"Political pressures will likely intensify," he said. "The political environment could change and we could see potentially an environment more conducive to to an adjustment."
Members of the House Budget Committee earlier this week held a field hearing in Dallas to discuss creating a fiscal commission to tackle the nation’s soaring debt.
"What we're looking for likely has to be a bipartisan effort to reform spending and/or increase taxes to improve the fiscal trajectory," Heydt said.
The federal fiscal deficit is large, structural in nature, and expected to worsen over time because of higher interest payments and age-related spending, including Social Security and Medicare. From 2026 to 2031, the fiscal deficit is expected to hover around 6% of GDP.
INTEREST COSTS
Another jump higher in Treasury yields will add to the pressure on the government's finances. "It's fair to say higher rates are going to, on the margin, increase the fiscal challenge facing the U.S. government."
The growth outlook is strong but risks are tilted to the downside, he added, expecting growth this year at 2.3%. An escalation in the U.S.-Iran conflict, a reassessment regarding the return on technology investments, and ongoing trade policy uncertainty could weigh on the outlook.
Heydt continues to continues to see significant structural strengths underpinning the U.S. credit profile. It is Morningstar DBRS’ expectation that the Federal Reserve will remain committed to its dual mandate and deliver low and stable inflation.
However, political pressures on the Fed that weaken the quality of monetary policymaking could also weigh on the credit rating, Heydt said. (See: MNI INTERVIEW: Fed Independence Still On Shaky Ground - Judge)
Sep-24 15:07
Germany is pushing for the European Union to toughen up “Made in Europe” provisions in its proposed Industrial Accelerator Act to ensure countries like China do not use manufacturing bases in third countries to bypass the requirements, according to a non-paper seen by MNI and likely to be discussed by EU industry ministers today.
The IAA aims to boost the resilience of European industry and reduce critical dependencies on third countries by building up domestic production capacity for low carbon basic raw materials and net zero technologies. While France has backed a narrow “Made in Europe” requirement, Germany has advocated for allowing it to include countries with which the EU has trade agreements or which comply with World Trade Organisation public procurement rules. (See MNI: EU Debates Whether 'Made In Europe' Includes Canada )
In the non-paper, Germany says that the IAA "must be structured in such a way that it is possible to react swiftly to activities aimed at adversely undermining " the aims of the legislation.
THIRD COUNTRY ROUTE
It calls for the European Commission to be given a "monitoring mandate" to ensure that nations on which EU industry already has "high dependencies" do not abuse 'Made with Europe' provisions by using production sites in approved third countries purely as export platforms to the EU Single Market.
"Relevant countries could be countries that establish production capacity in a partner country that falls within the scope of ‘Partner’s Origin’ mainly in order to meet the requirements of the IAA and where a significant share of production is targeted for the export into the EU, while at the same time direct high supply chain dependencies of the Union already exist from that third country".
The need to safeguard "critical industrial capacity" should also be considered when the EU decides to opt out a country or company from its approved status under the 'Made with Europe" provisions, the document states.
The current Irish presidency of the EU is hoping to finalise the Industrial Accelerator Act by the end of the year. China has already indicated its displeasure and has said it is monitoring the legislation.
One EU source described the German call as a "counterbalance" to the current French drive to limit the broad scope of the Commission's initial Made in Europe proposal as the legislation wends its way through the European Parliament and the Council.
Sep-24 10:42
The Norges Bank raised its policy rate by 25 basis points to 4.5% on Thursday, and said it is prepared to hike again if necessary.
"The Committee is prepared to raise the policy rate further if warranted by the inflation outlook," the summary of its deliberations said.
"The conflict in the Middle East is still creating uncertainty about the inflation outlook, and since June, prices for oil and gas and various other commodities have risen," Governor Ida Wolden Bache said at the press conference following the decision.
"Higher energy and commodity prices will result in higher costs for many domestic firms and higher prices for imported consumer goods. "
"On the other hand, the krone has appreciated so far this year and is now stronger than assumed in the June projections," she added, noting this "will in isolation pull down inflation."
The Committee took note of recent rate increases by the Federal Reserve and European Central Bank as well as rising long-term government bond yields in many countries, as "more rate hikes are expected in the U.S., the euro area and various other countries." (See MNI RIKSBANK WATCH: Holds And Sees Tightening Later This Year)
"Higher interest rates abroad pull in the direction of higher interest rates also in Norway, among other things, through the effect on the krone exchange rate," Wolden Bache said.
The Committee had also "discussed to what extent the increase in market rates abroad could imply a higher long-term neutral interest rate in Norway," the summary said.
DIVISION ON COMMITTEE
Despite the unanimous vote, the summary highlighted a division over views of the prospects for inflation to become entrenched.
Some believed this risk had "eased somewhat over the summer and that it could therefore be appropriate to await further information and keep the policy rate unchanged to avoid restraining the economy more than needed."
Others noted that inflation was too high and "expressed concerns that the monetary stance [was] not sufficiently restrictive," and emphasised "that unemployment has shown little change in recent months and that the driving forces still indicate that inflation will continue to run above target over the next years.”
CPI inflation was higher than expected in August at 3.3% while the rise excluding energy products and adjusted for tax changes (CPI-ATE) was 3.0%. "The Committee noted that the average of underlying inflation indicators was unchanged in August and stood a little higher than CPI-ATE inflation," the summary said.
Sep-24 09:57
The Riksbank’s Executive Board unanimously left its policy rate unchanged at 1.75% as widely expected on Thursday, but changed its guidance to steer to a hike in the fourth quarter.
Economic activity is stronger, supply shocks are continuing and unless things change "it is expected that the increases to the policy rate will begin this year,” the Board said.
The Board's rate path nudged the fourth quarter policy rate up to 1.85% from 1.82%, with that projection suggesting that a rate hike is more likely than not by the end of the year. The projection for Q1 was 18 basis points higher at 2.07%, leaving the door open to a second hike early in 2027.
In August, Riksbank Governor Erik Thedeen put the chances of a hike later this year at 50/50, but the deterioration in the geopolitical outlook has now pushed the Swedish central bank to clearly signal that tightening is now more likely than not. (See MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen)
The Board highlighted other risks apart from the war, noting "if there were to be signs of a larger and more persistent upturn in inflation, the Riksbank would raise the policy rate at a faster pace than in the current forecast.”
It revised up its forecast for its target inflation measure, CPIF, to 1.5% this year from 1.1% and to 2.1% in 2027, up from 1.7% previously. GDP growth was forecast to be 2.8% this year, up from 2.4%.
While recent inflation has been soft, with CPIF 0.7% in August, this was largely due to fiscal policy, notably a VAT cut, and the Riksbank assessed the ex-fiscal rate as close to the 2% target.
"There are still risks that inflation may be higher than in the forecast. As the war is continuing, the fundamental reason for the supply shocks also remains. The price of oil, electricity and fuel has risen recently, and the krona has also continued to weaken," the board said.
The krona was at the top of the advanced economy currency performance league in 2025 but has given up around half its gains this year, and "the recent weakening of the krona will gradually increase inflationary pressures in 2027. However, during the forecast period, the krona is expected to strengthen," the Riksbank stated, arguing that the currency was now weaker than fundamentals imply.
Sep-24 09:20Natural Resources Minister Tim Hodgson on Wednesday downplayed recent U.S. threats to replace Canadian heavy crude oil imports with product from Venezuela, a situation he had declined to comment on earlier this month when visiting the oil hub of Alberta.
“We can’t worry about what the Americans are doing. We’re just going to build for Canada,” Hodgson told MNI in brief comments as he left the House of Commons. President Donald Trump recently signed a deal to rebuild Venezuela's oil industry and move heavy crude to refineries around Texas in a bid to displace Canadian energy, part of the escalation of the trade war with Prime Minister Mark Carney. (See: MNI INTERVIEW:Paused Talks Help Canada In US Trade War-Verheul)
Sep-23 20:58
China should issue a total of up to CNY10-12 trillion in treasury bonds over three to four years to bail out local governments, one of the country’s most prominent economic advisors told MNI, calling for the same level of determination officials brought to dealing with non-performing bank loans in the 1990s.
Shanghai University of Finance and Economics Professor Yao Yang said the central government should issue up to CNY4 trillion in special treasuries annually during this effort. Bailing out local governments would permit them to settle outstanding payments which are the cause of chains of indebtedness between companies which he says is paralysing local economic activity.
While Yao does not expect his recommendations for local liabilities or the national property sector to be acted upon in the near term, he describes addressing local fiscal liabilities as the most significant economic issue facing China. He draws parallels between the present moment and the late 1990s banking crisis, when he said the economy came closest to collapse in modern times.
“The entire economy is grinding to a halt,” said Yao, who has participated in meetings with President Xi Jinping and former Premier Li Keqiang. The “triangular debt” between large-scale enterprises whose origins lie in local government liabilities totals about CNY30 trillion, he said.
A previous CNY12 trillion package in late 2024 aimed at regularising liabilities which local governments had hidden off-balance sheet in order to get around financing limits has had the effect of increasing the fiscal burden on local administrations, said Yao, who believes that much of the debt should instead have been written off.
The package included raising local governments’ debt ceiling by CNY6 trillion to swap out the hidden debt, as well as allocating an annual CNY800 billion in local special bonds for five years. The local government funding vehicles would have been technically registered as corporate defaults if they had been allowed to fail, noted Yao, but instead they have been linked to local government books.
In the event 12 provinces received most of the official support and were able to roll over and extend debt maturities to 20-30 years, with remaining regions having to raise their own funds for repayments, he added.
“Every country has to clean up its debt roughly every 20 years with the backdrop of a credit-based economy,” said Yao, who argues that the need to alleviate debt which impedes central government objectives overrides concerns over moral hazard.
At least 80% of local governments’ total debts are backed by tangible assets, many of which are currently idle, noted Yao. (See MNI: China's Investment Likely To Decline In 2026 - Advisors)
“If the central government could allow asset management companies to step in and sell off these high-quality assets, there is plenty of capital in the market to absorb them,” he said.
The best way to curb disorderly borrowing by local governments is to compel administrations at all levels to publish their balance sheets for public scrutiny, according to Yao. Such a reform was mentioned during the Third Plenary Session of the 20th CPC Central Committee but has proven virtually impossible to advance, he added.
REAL ESTATE
Yao also has suggestions for dealing with China’s struggling property market.
A national-level entity could acquire properties to provide public rental housing, especially those subject to judicial auctions, and could be funded by issuance of CNY2-3 trillion of corporate bonds, he suggested.
"If the central government puts the money on the table, housing prices would stabilise or even see a slight rise, with the entity possibly turning a profit at the end,” he said.
Over 700,000 foreclosed properties were listed last year, many of which were selling at half of market price, constantly eroding market confidence at the margins, said Yao. These properties should be purchased as soon as possible to reduce disruption to the market, he said.
Yao rejected suggestions that the housing market is in the early stages of a recovery, adding that the current increase in second-hand housing transactions with falling prices has characteristics of a fire sale.
Sep-23 11:35
You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.
Details below:
- Speaker: ECB Executive Board Member,Piero Cipollone.
- Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
- Date: Tuesday 6 October from 1400-15.30 London/0900-10.30 ET/15:00-16:30 CET
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
The Swiss National Bank looks set to keep monetary policy unchanged on Thursday, holding the policy rate at 0%, but following on from hikes at leading G7 central banks in recent weeks, the likely upward revision of inflation forecasts could signal monetary policy tightening is approaching in Switzerland too.
Futures markets currently see a probability of around 50% of a 25 basis-point rate hike at the December meeting, and such a move is fully priced in by the end of March 2027.
Recent comments from SNB President Martin Schlegel have been seen as a shift in a hawkish direction and policymakers in Zurich have not pushed back on the move in market pricing.
Swiss inflation rose to 0.8% year-on-year in August, above the SNB’s estimate for the average rate in Q3 2026, with a continued rise in fuel prices pointing to further increases in the coming months, perhaps pushing the consumer gauge above 1% y/y for the first time since the summer of 2024. These factors should be reflected in the forecasts.
Together with the impulse from energy prices, consumer prices could also face demand-side pressures after economic growth in the first half of 2026 exceeded expectations. A pick-up in new orders alongside resilient foreign demand point to GDP growth still at an above-potential rate in H2 2026.
CURRENCY MOVES
Recent franc weakness risks pushing imported inflation higher. Barring favourable energy price shocks or severe adverse shocks to growth, analysts at EFG says "it would not be surprising if the SNB adopted a less expansionary monetary policy before the end of 2026."
The SNB has two tools at its disposal to tighten financial conditions: the policy rate and foreign exchange market interventions. The SNB's primary tool is the policy rate, but the SNB has used the FX markets historically to influence the exchange rate and thereby adjust its monetary policy stance. Normally, FX activity was meant to counter franc appreciation but -- as in 2022-23 -- the SNB has also used intervention to tighten financial conditions.
"It is highly likely that the SNB will keep rates at 0% at its upcoming meeting on Sept 24. The SNB’s likely upward revision of inflation forecasts will signal that a monetary
policy tightening is approaching in Switzerland too," said GianLuigi Mandruzzato, senior economist at EFG Bank.
The Riksbank is generally expected to hold its policy rate at 1.75% on Thursday, though it is expected to raise its inflation forecasts given persistently high energy costs, and analysts anticipate an increase in its rate path to indicate a higher probability of a hike before year end than the 50% mentioned in June.
The Bank has held rates unchanged since its cut in September 2025. Inflationary pressures have been weaker than in many other advanced economies, with the target CPIF inflation measure consistently below 2%. Annual CPIF ex-energy inflation fell from 0.6% to 0.5% in August.
The Riksbank's estimate of the long-run neutral rate is between 1.5% and 3.0%, locating the current policy stance towards the bottom of the range, but the latest rate path trends slightly upward. The persistence of the Middle East conflict and associated increases in energy prices remain in focus, and in August, the Board assessed "that the probability of a rate increase later this year remains."
This guidance could be strengthened by adding a line stating that a rate hike this year was now seen as likely.
In June, Governor Erik Thedeen had said the chances of a hike were about 50/50. (See MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen)
The Riksbank’s Executive Board, however, has been split, making agreement on guidance trickier. Deputy Governor Anna Seim, at the hawkish end, could dissent and vote for a hike this month while on the other side Deputy Governor Per Jansson said at the August meeting that the deterioration in the geopolitical outlook presented primarily a communication challenge and that the deterioration in the inflation outlook was slight.
Sep-22 15:31
Analysts are split down the middle as to whether Norges Bank will raise its key policy rate from 4.25% at its Sept 24 meeting, as it balances a deteriorating geopolitical outlook and higher energy prices against softening domestic activity.
While Norges Bank said at its last meeting that a further rate increase "may still become necessary," it has not specified timing, and Norway's policymakers have steered away from meeting-specific guidance since catching analysts off guard with their May hike.
If the Bank's policy committee shares the market consensus that another hike remains likely, then there would seem to be little value in delay at a time when concerns over higher energy costs have helped prompt tightening at the Federal Reserve, the European Central Bank and the Bank of Japan.
The market curve has fully priced in a hike by end-2026, with the next likely opportunity coming at the December meeting.
But inflation has surprised to the downside amid signs of the economy cooling. The central bank's own Regional Network business survey found that, after picking up through 2025, growth has slowed this year, with output expected to rise just 0.3% in Q3 and Q4. On the core CPI-ATE target measure, inflation dipped to 2.7% in June and July before rising to 3.0% in August, still below Norges Bank's 3.3% forecast.
The policy rate is already in restrictive territory, with Norges Bank's most recent estimate of the neutral rate lying in a range between 2.25% and 3.75%. (See MNI INTERVIEW: Norges Head Sees Rate Hike Despite Iran Deal)
Norges Bank's most recent quarterly rate path was consistent with a little more than one 25 basis point hike. The new monetary policy report on Tuesday will likely adjust the near-term rate path.
If the Bank doesn't hike, the near-term path would likely be lowered for the fourth quarter from just over 4.5%, in a signal that a rate hike this year is not a done deal. If they do hike the rate path is still likely to tilt upwards, leaving the door open to a further increase in either Q4 or Q1 next year. (See MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates)
Sep-22 11:57About
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