 "Why has Moody’s downgraded the US’ credit rating?")
Moody’s has downgraded the US’ credit rating.
The development comes months after US President Donald Trump was sworn in for a second term.
It comes as the United States has been witnessing financial and economic uncertainty over Trump’s trade policies.
It also comes in the backdrop of the US Congress attempting to pass a bill that makes Trump’s 2017 tax cuts permanent.
United States Treasury Secretary Scott Bessent has reacted to the move with derision. “I don’t put much credence in Moody’s,” Bessent said.
But what happened? And what does this really mean?
Let’s take a closer look:
What happened and why?
As per CNBC, the US was previously assigned AAA rating for its government bonds.
The AAA is widely known as the highest rating any agency can give when it comes to creditworthiness.
This relates to the chances that the country or institution issuing the bond will fulfil its financial obligation.
This is a signpost for investors to look at when deciding whether or not to invest in bonds.
Moody’s previously had the US at an AAA rating.
However, on May 17, the agency cut the US’ rating to AA1, as per CNBC.
The agency said the main reason it was making the move is because of the US failing to manage its rising debt.
The US government currently is around $36 trillion in debt.
Moody’s cited the ballooning debt of the US as well as higher payment ratios compared to other nations in the same category.
It said mismanagement by successive governments had resulted in the rating being downgraded.
It warned that by 2035, deficits would increase to nine per cent of the US economy compared to 6.4 per cent in 2024.
It chalked up the reason to increasing interest payments, US entitlement, and relatively weak revenue generation.
“It basically adds to the evidence that the United States has too much debt,” said Darrell Duffie, a Stanford finance professor who was formerly on Moody’s board. “Congress is just going to have to discipline itself, either get more revenues or spend less.”
However, Moody’s noted that the US “retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency.”
“We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating. We have also removed both the short- and long-term ratings from CreditWatch negative,” the rating agency said as per CNBC.
“The prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the administration agreed to this week falls short of the amount that we believe is necessary to stabilise the general government debt burden by the middle of the decade,” the agency mentioned in its report.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the agency said in its report.
“We anticipate that the federal debt burden will rise to about 134 per cent of GDP by 2035, compared to 98 per cent in 2024,” Moody’s said as per Business Standard.
As per Mint, Moody’s said it would upgrade the US’ rating if it took the appropriate steps to address the deficit.
Moody’s first gave the United States the top AAA rating in 1919.
What does this mean?
It means the US no longer has a top credit score from any agency.
While Fitch cut the US’ credit rating from AA to AA+ in 2023, Standard & Poor’s did so all way back in 2011.
As per CNN, S&P’s had cited concerns over the debt and partisanship from the two parties.
The move increases the risk of default – and thus the cost of borrowing.
Treasury yields rose and US stock futures slipped with the dollar on Monday.
The US 10-year yield rose 7 basis points to 4.510 per cent. The 30-year yield rose above 5 per cent for the first time since April 9, the day Trump paused most of his so-called reciprocal tariffs for 90 days.
Meanwhile, gold prices rose more than 1 per cent on Monday, helped by a weaker dollar and safe-haven demand.
“Gold’s safe-haven appeal has been swiftly rekindled by growing concerns over U.S. debt,” said Nikos Tzabouras, Senior Market Analyst at Tradu.com.
But experts don’t see any major adverse reaction of the ratings cut in either the US or the Indian stock market – at least in the long term.
G Chokkalingam, founder and head of research at Equinomics Research, pointed out to Business Standard that the S&P 500 had increased by 400 per cent since the S&P downgrade in 2011.
Since Fitch lowered the US’ credit rating in 2023, the S&P 500 is up by nearly 33 per cent, Chokkalingam added.
“The US is taking a lot of measures to cut expenditure and is also keen to rejig taxes . Further, substantial measures in terms of tariffs on imports from all major economies would help it to improve economic growth, which in turn would reduce the debt-to-GDP ratio. Hence, this move is unlikely to have any long-lasting impact even in the short-term except possible knee jerk reactions on Monday,” Chokkalingam said.
“I don’t think there will be much reaction. US Treasury yields are likely to climb, but they already did so to some extent on Friday. Moody’s Ratings development is more to get the agency in line with what the other rating agencies – Fitch and the S&P – already did long ago. Barring a knee-jerk reaction in the global financial markets, including India, I do not see this having much impact,” UR Bhat, co-founder & director, Alphaniti Fintech, told Business Standard.
CNBC quoted Vasu Menon, OCBC’s managing director of the investment strategy team, as writing in a note, “It does however reinforce concerns about the growing US budget deficit and debt, but these are not new and have been discussed extensively for the past few months, and even years.”
However, experts have slammed US Congress for trying to pass yet another tax cut – which some say could between $3 trillion and $5 trillion more to the deficit.
“What Moody’s sees, plain and simple, is that the ballooning debt is not being addressed,” said George Lagarias, chief economist at Forvis Mazars. “The Republican mega bill is also contributing to rising yields.”
“The downgrade of the US credit rating by Moody’s is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States,” said Spencer Hakimian, chief executive at Tolou Capital Management, a hedge fund.
“They have got to come up with a credible budget agreement that puts the deficit on a downward trajectory,” said Brian Bethune, an economics professor at Boston College, referring to Republican lawmakers.
With inputs from agencies
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