Introduction
The recent credit rating downgrade of the United States by Moody’s, while not a surprise, serves as a reminder of the state of the US economy and its implications for the global financial ecosystem.
Background on US Credit Rating
Moody’s is the last major credit rating agency to strip the US of its perfect Aaa rating, which was previously downgraded by Standard & Poor’s in 2011 and Fitch Ratings in 2023. The US has lost its perfect rating due to deteriorating finances, dispelling the myth of an infallible dollar printing monopoly.
The US public debt-to-GDP ratio stands at 124%, although it has decreased from a pandemic-era high of 130% in 2021. However, the concern lies in the lack of a credible fiscal plan to address budgetary shortcomings during periods of economic prosperity.
US Fiscal Position
At the end of fiscal year 2024, the US budget deficit reached $1.83 trillion, equivalent to 6.4% of its GDP. As the risk of default payment increases, so does the required risk premium for holding US debt.
The political message is that the current administration, with its legislative majority, lacks a believable, reliable, and sensible fiscal correction plan.
Impact on Global Markets, Including Mexico
With a lowered credit rating, the US will need to offer higher interest rates to attract investors, creating a ripple effect on other markets like Mexico’s. These markets must adjust their risk premiums according to the US Treasury bond market’s performance.
The article implies that Mexico should be prepared for potential credit rating downgrades, as the US situation could negatively impact global investor confidence.
Historical Context: Trump’s Fiscal Strategy
The text briefly mentions Donald Trump’s aggressive fiscal strategy, which aimed to increase external tax revenues through tariffs to lower domestic tax burdens. However, the strategy failed to anticipate that local consumers, producers, financial entities, and policymakers would rely on the open-trade model for growth.
Implications for US Monetary Policy and Mexico
This credit rating downgrade serves as a warning not only to the US fiscal authority but also to the Federal Reserve’s monetary policy decisions. The Fed must carefully assess the impact on its interest rate reduction timeline.
Mexico’s federal government should also take note, as the country may face credit rating downgrades, potentially leading to a “junk bond” status.
Key Questions and Answers
- What is the significance of the US credit rating downgrade? The downgrade reflects deteriorating US finances and serves as a reminder of the global financial ecosystem’s interconnectedness.
- How does this impact other markets, like Mexico’s? The US must offer higher interest rates to attract investors, which can lead to adjustments in risk premiums in other markets, including Mexico.
- What was Donald Trump’s fiscal strategy? Trump aimed to increase external tax revenues through tariffs, intending to lower domestic tax burdens.
- How should the US and Mexico respond to this downgrade? The US fiscal authority and Federal Reserve must carefully consider the implications for their policies. Mexico should prepare for potential credit rating downgrades.
