- Moody’s downgrades US credit rating On Friday evening, there will be one rung from AAA to AA1. This means that federal debts no longer perform at any of the major rating agencies. Moody’s cited “a decade-long increase in government debt and interest payment rates to levels significantly higher than similarly valued sovereigns.”
A recent debt explosion has led Moody’s to ultimately downgrade its US credit on Friday evening. This means that federal debt does not deliver the highest performance at any major rating agency.
Moody’s cut one US rung from AAA to AA1 after sounding the alarm of its degraded financial situation in March. In November 2023, Moody’s negatively lowered its US debt outlook.
“This one record downgrade on the 21 Notch rating scale reflects a decade-long increase in government debt and interest payment rates to levels significantly higher than similarly rated sovereigns.” The agency said in a statement.
“All US administrations and Congress have not agreed to measures to reverse the trends in large annual fiscal deficits and rising interest costs. We do not believe that mandatory spending and significant annual reductions in deficits are attributable to current fiscal proposals.”
The downgrade comes when Republican-controlled Congress seeks to extend tax cuts from President Donald Trump’s first term and add new ones, such as hints, overtime and Social Security income termination taxes.
Lawmakers are also looking to cut spending, but the overall impact of the fiscal proposal will add trillions to the fiscal deficit over the coming years.
This is because the fiscal deficit has so far exceeded $1 trillion in this fiscal year, reaching $2 trillion in the previous fiscal year. Debt payments alone are one of the biggest spending items beyond the Pentagon budget.
Moody’s is expected to expand from 6.4% in 2024 to nearly 9% of GDP by 2035. As a result, US debt will rise to 134% of GDP by 2035, up from 98% in 2024. Interest payments could account for 30% of revenue by 2035, up from around 18% in 2024.
“We expect a bigger deficit over the next decade as eligibility spending rises, as government revenues remain flat significantly,” Moody said Friday. “In turn, a sustained, large fiscal deficit promotes high government debt and interest burdens. The US fiscal performance could be worse than its own past compared to other highly rated sovereignty.”
With a low rating, Moody’s puts the US outlook on Stable, focusing on its strong economy and the role of the dollar as a reserve. But that “exorbitant privilege” can no longer make up for the soaring mountains of debt.
“We recognize the important economic and financial strengths of the United States, but we believe that these will no longer completely offset the decline in fiscal measures,” Moody’s added.
In a statement luckWhite House spokesman Kush Desai pointed to trillions of dollars on hiking the Federal Reserve for spending, debt and inflation fuel under the Biden administration and Democrat-controlled Congress.
“The Trump administration and Republicans are focusing on fixing Biden’s chaos by cutting government waste, fraud and abuse and passing on a big, beautiful bill to keep our homes organized,” he added. “If Moody’s had been credible, they wouldn’t have remained silent as the financial disasters unfolded over the past four years.”
Moody’s was the last of the major rating agencies that gave us debt to the top mark. Fitch cited the brink of cutting one US in 2023, citing the brink of financial degradation and repeated debt. It followed a similar downgrade from Standard & Poor’s in 2011 after the previous debt cap crisis.
Despite Friday’s downgrade, Moody’s also had hopes not only for US institutions (even if tested) but also for financial and macroeconomic policy decisions.
“We assume that the long-standing checks and balances between the three branches of government and respect for the rule of law will not change at all,” he explained. “In addition, we appreciate that the United States has the ability to adjust its fiscal trajectory, even if it evolves from one government to the next institution,” he said.
This story was originally featured on Fortune.com.
