The author is the president of Structured Credit International and a former senior vice president of Standard & Poor's Latin American debt crisis
Donald Trump has just obtained a questionable difference: For the first time in more than a century, there is no AAA credit rating for any major institution in the United States. Moody downgraded the U.S. to AA1 last week, depriving the country of its last triple A.
Moody's decision made an unwelcome judgment on the U.S. fiscal after S&P Global Ratings' historic downgrade in 2011 and similar layoffs in 2023, and it landed completely at President Trump's doorstep.
Each of the Big Three ratings lowers the same basic problem: chronic financial mismanagement driven by political paralysis. The downgrade of S&P in 2011 comes after a tough debt battle and a deficit reduction program, which it considers inadequate due to strong political polarization and a lack of reliable solutions.
Fitch's action in 2023 warns that the marginal regime of U.S. governance and perennial debt restrictions have deteriorated steadily. Moody's now adds that despite a decade of debt increase, Washington has limited budget flexibility. Rights expenditure is climbing, tax revenue lags, and neither side is willing to compromise. The information from these institutions is clear: partisan deadlock and policy uncertainty in the United States can have serious financial consequences.
Past downgrades failed to scare investors - Treasury would rallies by chance in 2011 after S&P cuts, and Fitch's 2023 move had little lasting impact on U.S. bond yields.
This time, we see the yield on 30-year U.S. Treasury bonds rise above 5%, a recent peak that has risen higher after Trump suspected of tariffs rising on Liberation Day.
As long as the U.S. government continues to fulfill its obligations, Treasury Department debt retains its quasi-status as a “risk-free” benchmark. Currently, all three agencies will allocate stable prospects to the United States, indicating no immediate downgrade. But Moody's warns that if debt indicators or governance worsen further, another rating could be lowered. In short, the White House is hooking up to prevent credibility sensitivity.
Politically, Moody's verdict exacerbates Washington's game of blame. Democrats claim it proves their warning about Trump’s fiscal policy — Senate Democratic leader Chuck Schumer called it a “wake-up call” to stop Republicans from “underdestructive tax giveaways.” Republicans retort that overspending rather than tax cuts are the real culprit, and some view downgrades as overreactions by rating agencies.
This is a replay of the showdown in the past. After the 2011 S&P cuts in 2011, every political aspect is pointing at the finger. The Obama administration also sued Standard & Poor's in 2013 for mistakes during the financial crisis, causing credit institutions to pay $1.5 billion to resolve the lawsuit. Biden officials blow up the move as "arbitrary" after Fitch's downgrade in 2023.
The unsettling fact is that both sides have mastered emerging U.S. debt, but neither supports a lasting solution. "For more than a decade, U.S. federal debt has risen sharply due to ongoing fiscal deficits," Moody's said in his downgrade. "During this period, federal spending has increased, and tax cuts have reduced government revenue. As deficits and debts grow, interest rates grow, interest rates rise, interest rates increase, interest rates increase, interest rates for government debt increase."
Structural dysfunction – deeply rooted polarization and permanent marginality – is almost impossible for serious fiscal reforms. The dysfunction remains. Without bipartisan spending and income, the U.S. fiscal trajectory will deteriorate no matter who occupies the Oval Office.
An important reason for the impunity of US lending is the unparalleled role of the US dollar as the world's reserve currency. However, the share of international reserves held in the US dollar fell from nearly 80% in the 1970s to less than 60%. Moody acknowledges that the dominance of the US dollar as a reserve asset provides us with extraordinary financial flexibility.
Even after past downgrades, global investors have continued to buy U.S. debt, seeking its security, stressing that there is still no obvious alternative to U.S. Treasury bond depth and liquidity. But this kind of mat is not foolproof and not forever. The panic of every debt ceiling and every credit warning are full of confidence in the management of the United States.
The complete loss of AAA status is a symbolic blow to American reputation. It should stimulate Washington to gradually erode its fiscal House of Representatives before its belief in the dollar and financial aberrations in the country.