On May 16, Moody's downgraded the credit rating of the United States from "Aaa" to "Aa1", i.e., from exceptional creditworthiness with virtually no risk of default to a slightly lower capacity to meet its obligations compared to Aaa. This was due to the sustained increase in public debt; according to the rating agency, US federal debt has grown significantly, projected to reach 134% of GDP by 2035, up from 98% in 2024. Other factors noted by Moody's include persistent fiscal deficits, political uncertainty and interest costs.
The downgrade has only happened twice before, both of which led to volatile market reactions:
1) 8/5/11 - Standard & Poor's downgrade.
S&P downgraded the U.S. rating from AAA to AA+, citing political uncertainty during the debt ceiling crisis and the lack of a credible medium-term fiscal plan.
2) 8/1/23 - Fitch downgrade
Fitch downgraded the U.S. rating from AAA to AA+, due to fiscal deterioration, repeated borderline debt ceiling negotiations and governance concerns.
US Treasury Secretary Bessent commented on Moody's downgrading the US' credit rating: "I don't put much credence in Moody's".
Bessent called Moody's a "lagging indicator," arguing that credit rating agencies often reflect conditions already known to the market. He said the reasons for the downgrade, such as rising debt and interest costs, are already built into investor expectations and do not represent significant news. He also noted that, despite the downgrade, there is strong confidence in the U.S. economy, evidenced by "billions of dollars" of foreign investment coming into the US, especially from nations such as Qatar, Saudi Arabia and the United Arab Emirates.
Credit ratings are used more as a political weapon than a real indicator of what is happening in a country's economy. Mexico, for example, has been downgraded by Moody's several times. On November 14, 2024 Moody's changed Mexico's rating outlook from stable to negative, although it maintained the overall rating at Baa2. This decision was based on institutional weakening, particularly due to the judicial reform, the increase in the fiscal deficit and Pemex's debt burden.
However, the markets reacted (as expected) at the beginning of the week and painted themselves in red.
The trade war continues:
Good question
The downgrade has only happened twice before, both of which led to volatile market reactions:
1) 8/5/11 - Standard & Poor's downgrade.
S&P downgraded the U.S. rating from AAA to AA+, citing political uncertainty during the debt ceiling crisis and the lack of a credible medium-term fiscal plan.
2) 8/1/23 - Fitch downgrade
Fitch downgraded the U.S. rating from AAA to AA+, due to fiscal deterioration, repeated borderline debt ceiling negotiations and governance concerns.
US Treasury Secretary Bessent commented on Moody's downgrading the US' credit rating: "I don't put much credence in Moody's".
Bessent called Moody's a "lagging indicator," arguing that credit rating agencies often reflect conditions already known to the market. He said the reasons for the downgrade, such as rising debt and interest costs, are already built into investor expectations and do not represent significant news. He also noted that, despite the downgrade, there is strong confidence in the U.S. economy, evidenced by "billions of dollars" of foreign investment coming into the US, especially from nations such as Qatar, Saudi Arabia and the United Arab Emirates.
Credit ratings are used more as a political weapon than a real indicator of what is happening in a country's economy. Mexico, for example, has been downgraded by Moody's several times. On November 14, 2024 Moody's changed Mexico's rating outlook from stable to negative, although it maintained the overall rating at Baa2. This decision was based on institutional weakening, particularly due to the judicial reform, the increase in the fiscal deficit and Pemex's debt burden.
However, the markets reacted (as expected) at the beginning of the week and painted themselves in red.
The trade war continues:
Good question