Moody's pulled the trigger Friday and stripped the U.S. top score - lowering it from AAA to AA1.
But does it matter?
We looked at the meaning of the downgrade a few months ago, when Moody still seemed determined to ignore it Sixty feet flashing neon sign Written on the wall.
From the perspective of the stock market, who knows? We don't know if or how much it matters when trading on Monday. Of course, the downgrade of S&P's U.S. sovereignty prompted the worst single-day decline in U.S. stock prices since the global financial crisis (then the most recent) global financial crisis. But the market quickly recovered. This may be people who are afraid of what downgrades may mean for financial pipelines.
So, is this downgrade crucial for financial plumbers? From a mechanical point of view, the answer is almost certainly "not at all".
The risk-weighted capital asset calculations of banks seem unlikely to be affected by rating changes. This is because regulators do not tend to distinguish between AAA and AA1 when setting capital risk weights. For example, this is how BIS stipulates its standardized credit risk approach, as it applies to individual claims to calculate its risk-weighted assets with sovereignty:
Moody's could have done a three-school relegation - from AAA all the way to AA3 - nothing changed in that regard.
How about mortgage management? On Friday night, Barclays’ notes studied:
For mortgage purposes, downgrading to AA1 is unlikely to have an effect. For example, DTCC and CME refer to asset classes as U.S. Treasury, while hairstyles are functions of mature and secure types (hint/FRN), rather than ratings. In LCH, downgrading to AA1 is unlikely to cause changes. For example, UST and GILT have similar hairstyles, even if the latter has a lower score.
Furthermore, they believe that this move will not trigger movement at the short end of the curve because:
Since the financial crisis, legislation has reduced the use of clear rating guidelines in investment mandates.
Therefore, they will not expect to be in the Treasury’s approximately $450 million asset sales wave and financial reserves in the fiscal reserves.
Staying away from financial markets, downgrades may be important to Moody's itself. If S&P Global Ratings has any effort in its experience in 2011, the company will have a difficult journey. After the S&P escalation more than a decade ago, U.S. Treasury Secretary Tim Geithner threw some public swings, and filmmaker Michael Moore called on Obama to arrest the company's CEO. As we wrote in March:
Someone hired a plane to fly over the office of its rating agency, dragging banners, claiming that they should all be fired, and a group of local governments terminated their operations with the company.
Meanwhile, it is obviously irrelevant, the Justice Department investigated Standard & Poor’s. Within a few weeks, CEO Deven Sharma left the company. When things went from being solely an investigation into a federal lawsuit that was actually $5 billion, as allegedly misleading the credibility of its ratings before the 2008 financial crisis, Standard & Poor said this direct retaliation for its downgrade.
After the downgrade, Moritz Kraemer, former global chief rating officer of S&P Global Ratings’ Sovereign Ratings, wrote on LinkedIn that the danger of retribution is real:
In the United States, rating agencies are regulated and licensed by the SEC (SEC). Now, we must wonder whether the SEC can act independently of the White House’s will. Remember, former SEC chairman Gary Gensler resigned on Inauguration Day as Trump's Servant. Trump will be so angry that he will demand his own flesh and avenge Moody.
We have seen the White House dismiss the analysis and slammed it in Moody's chief economist Mark Zandi. Presidential assistant Steven Cheung tweeted: "No one takes his 'analysis' seriously. He has been proven wrong again and again."
As Mainft reports, Zandi is not the author of this report and works for Moody's Analytics, a separate part of the company and not part of its rating business.
More generally, while AAA's downgrade may not have a huge market impact, it is still important.
Financially speaking, Moody's has long expected the U.S. near rebounding indicator. Reiterating the AAA rating in March, it wrote that the country’s AAA rating relies on the country’s “extraordinary economic strength and the unique and central role of the dollar and fiscal bond markets in global finance.”
Moody’s reiterated the AAA rating in its previous rating report, Moody’s wrote:
Weakening of institutional and governance forces, such as through deterioration in the effectiveness of monetary and macroeconomic policies or the quality of legislative and judicial institutions, may also undermine ratings.
The world has been growing since 2023, and Moody's is marking it to the market.