Introduction
Moody’s, one of the world’s leading credit rating agencies, has downgraded the United States’ credit rating from “Aaa” to “Aa1.” This change reflects concerns over the country’s high public debt and its unsustainable debt trajectory under President Donald Trump’s administration.
Background on Moody’s Rating System
The difference between the “Aaa” and “Aa1” ratings is minimal regarding payment capacity, as both are part of the high-quality group on Moody’s scale. The U.S. debt currently stands at 88% of its GDP with a fiscal deficit of 7.5% of GDP, according to Moody’s.
Current Debt Situation
As per the International Institute of Finance, U.S. government debt reached 120% of its GDP at the end of last year, surpassing the average of advanced economies, which was 114% at that time.
Moody’s projects that interest payments will account for 35% of fiscal revenues by 2035, nearly double the 18% they represented last year.
Moody’s Concerns and U.S. Response
Moody’s highlighted that the proposed budget in the U.S. Congress “will not significantly reduce spending or future deficits.” The agency also warned that a deterioration in policy effectiveness or institutional strength could lead to further credit rating downgrades.
Upon learning about the downgrade, U.S. Treasury Secretary Scott Bessert stated that Moody’s rating was “lagging” in reflecting the country’s financial conditions. He attributed the downgrade to the spending policies of the previous Biden administration, emphasizing that the current government has “only been in power for about 100 days.”
Perspectives and Future Outlook
Moody’s changed the rating outlook from negative to stable, indicating no further downgrade is expected within six to eighteen months. However, the U.S. had been on a negative watch since November 2024, signaling a potential downgrade risk for almost two years.
Moody’s, along with Fitch and S&P, are the three major global credit rating agencies. Fitch rates 120 countries, S&P rates 137, and Moody’s rates numerous countries worldwide.
Key Questions and Answers
- What is the significance of the downgrade? The downgrade reflects concerns over high public debt and an unsustainable debt trajectory under the Trump administration.
- How does this affect U.S. borrowing costs? The impact on borrowing costs is minimal due to the small difference between “Aaa” and “Aa1” ratings.
- What does the stable outlook mean? The stable outlook suggests no further downgrade is expected within six to eighteen months.
- Which agencies rated the U.S.? The U.S. credit rating is assessed by Moody’s, Fitch, and Standard & Poor’s (S&P).
