Racial inequality could hurt America’s credit rating, warns Moody’s

Failure to close the yawning wealth gap between black and white Americans could end up tarnishing the country’s credit rating, according to Moody’s Investors Service.

The so-called racial wealth gap in the United States has continued to widen in good times and bad. White household net worth rose 43%, to $ 61,200, between 1995 and 2016, while it remained apartment to $ 35,400 for black families, the credit rating agency said in a report on Tuesday, citing data from the Federal Reserve. In 2016, only 8% of blacks inherited an average of $ 83,000 in wealth from their parents, compared with more than a quarter of whites who inherited an average of $ 236,000.

Moody’s, Standard & Poor’s, and other major rating agencies continue to give US government debt a high rating, which means lower borrowing costs. But the racial economic divide could change that.

“The unequal position of the black community in the United States is a salient and enduring feature of the dynamics of inequality that illustrates and exacerbates the social risks associated with credit,” William Foster, senior credit manager at Moody’s, told investors.

Homeownership gaps

This divergence exacerbates a growing inequality visible in the US economy. But Moody’s says the divergence has “a disproportionate impact” on black people, making them more vulnerable to megatrends such as globalization and automation. Discriminatory practices such as “redlining“also continue to weigh on black households, limiting their access to mortgage loans, credit cards and other types of loans.

In 2019, for example, 44% of black households owned their homes, compared to 74% of white households, according to Moody’s.

A recent loan tree to study found that black mortgage applicants were turned down 12.6% of the time, more than double the national average of 6.4% for all other ethnicities. Lenders often reject black borrowers even when they have adequate income and strong credit, said Tendayi Kapfidze, economist at LendingTree, author of the study.

The low rate of homeownership and “the accumulation of hundreds of years of discrimination has resulted in a large wealth gap,” Kapfidze said.


Redlining and its legacy

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Other drivers of inequality, including discrimination in criminal justice practices and in the workplace, further prevent black Americans from catching up.

Stemming racial inequalities may continue to fuel the kind of civil unrest that followed the death of George floyd in the hands of Minneapolis police, according to Moody’s.

“Even though the immediate implications of the protests on credit were limited, the increased social risk, if not taken into account by policymakers, may have negative longer-term implications,” Foster said. .

In contrast, closing the racial wealth gap could increase the country’s gross domestic product – the total value of goods and services – by up to 6% by 2028, Moody’s said, citing a report from consulting firm McKinsey. That’s the equivalent of $ 4,300 for every American.

“While there are indeed many social and economic issues that have contributed to the increased political polarization of the United States in recent years, the combination of income and racial inequality should be a powerful force for potential further polarization and inertia. “Moody’s said. noted.

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