The United States loses its last highest credit rating, and Moody's downgrade

(Bloomberg) -

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The U.S. was deprived of its last credit rating by Moody's rating, reflecting that a surge in debt and deficits would damage the U.S. status as a prominent destination for global capital and increase government borrowing costs.

Moody's lowered its U.S. credit score from AAA to AA1 on Friday, joining the Fitch rating and the Standard & Poor's Global rating, rating the world's largest economy below the highest Triple-A position. Moody's has changed its outlook for the U.S. rating to a negative year for more than a year. Credit appraisers now have stable prospects.

"While we recognize the significant economic and financial advantages of the United States, we believe that the decline in these fiscal indicators is no longer fully balanced," Moody's wrote in a statement.

Moody's continuous administration and Congress accused the budget of insufficient, indicating no sign of abatement. On Friday, Washington lawmakers continued to work to reach a massive tax and spending bill that is expected to add trillions of dollars to federal debt in the coming years.

The White House made the move a political decision on Friday. President Donald Trump spokesman Steven Cheung picked up Mark Zandi, an economist for Moody's analysis, in an article on X, accusing him of being a long-time critic of government policy.

Zhang said: "No one takes his analysis seriously. Moody's ratings are a separate group with Moody's analysis. Zandi did not immediately respond to a request for comment Friday night.

The response from major financial markets responded quickly to the decision, with the ten-year notes rising as much as 4.49% in stock yields. Exchange-traded funds tracked aftermarket trading of the S&P 500 S&P 500 fell 0.6%.

"The downgrade may indicate that investors will demand higher Treasury yields," said Tracy Chen, portfolio manager at Brandywine Global Investment Management. Although U.S. assets responded to Fitch and Standard & Poor's previous U.S. downgrades, "whether the market responded differently, as the nature of the treasury and safe haven for the dollar may be somewhat uncertain."

The shift comes as the federal budget deficit runs nearly $2 trillion a year, accounting for more than 6% of GDP. The weaker U.S. economy will increase deficits after the global tariff war, as government spending will usually increase as activity slows.

This prospect is because the overall debt level in the United States has exceeded the size of the economy since Covid. Higher interest rates have also increased the cost of repaying government debt in the past few years.

In May, U.S. Treasury Secretary Scott Bessent pointed out that he was a key indicator of 10-year yield, telling lawmakers that the U.S. is on an unsustainable trajectory: “The debt figure is really scary” and the crisis will involve “an sudden stop in the economy due to the disappearance of credit,” he said. “I’m committed to what’s not going on.”

Legislators have been working to promote tax packages, including provisions set out in the 2017 Tax Cuts and Jobs Act because they have doubts about slowing down spending. Over the next decade, the Joint Tax Commission has set the total cost of the bill at $3.8 trillion, although other independent analysts say it could cost more if the provisional provisions in the bill were extended.

However, a key House committee failed to introduce a House Republican tax and spending bill Friday, but after hard conservatives shocked Trump and blocked the cost issue.

Joseph Lavorgna, who works for the White House National Economic Commission in the Trump First Administration, said the timing of the downgrade was "very strange" because Congress was working hard. Lavorgna, now chief U.S. economist at SMBC Nikko Securities, said a 100% debt-to-GDP ratio is also "not uncommon in the world."

He said the United States is the fastest growing industrialized country with the best per capita productivity, so it doesn't make sense to downgrade.

Worrisome prospects

The Congressional Budget Office warned in January that the U.S. government would surpass post-World War II debt levels in just four years, reaching 107% of GDP by 2029.

The estimate does not include the potential impact of economists adding trillions of dollars in government red ink over the next decade. In the long run, federal spending on Social Security and Medicare is expected to increase federal debt over the next few decades, while higher interest rates will increase the cost of debt services.

The CBO said in March that the risk of a fiscal crisis “seems to be low” but it is impossible to reliably quantify the danger.

The rating company expects “the federal deficit will expand to account for nearly 9% of GDP by 2035, up from 6.4% in 2024, driven primarily by increased interest expenses on rising debt, increased entitlement expenses and relatively low income.”

Moody identified higher fiscal gains as a factor that hurts U.S. fiscal sustainability. The prevalence of levels before 2007 and before the financial crisis was close to 4% to 5% yields.

The path to downgrade

Moody's downgrade has been in progress since November 2023 when the agency lowered the U.S. rating prospects to negative while confirming the U.S. rating on the AAA. Typically, rating actions are taken over the next 12 to 18 months, so this change occurs.

Credit companies are the last of three companies to abandon their highest ratings. Fitch's viewership lowered the U.S. by a level in August 2023 and cited fears of political quarrels over debt ceilings, which put the country on the brink of default.

The Standard & Poor’s Global Rating was the first major credit rating to strip its AAA rating in 2011 and was severely criticized by the Treasury at the time.

- With the assistance of Liz Capo McCormick, Edward Bolingbroke, Amanda Fung, Ye Xie, Anya Andrianova, Elena Popina and Jade Khatib.

(Add to the White House in paragraph 5)

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