Moody’s has issued its first downgrade of the US credit rating since 1917, dropping the nation from a coveted AAA to Aa1. This significant move reflects growing concerns about the country’s debt affordability and the persistent failure of successive administrations and Congress to address escalating fiscal deficits and interest costs.
The decision aligns Moody’s with Fitch Ratings, which downgraded the US to AA+ in August 2023, and Standard & Poor’s, which made a similar move in August 2011. Moody’s cited a more than decade-long increase in government debt and interest payment ratios as key factors driving the downgrade. While acknowledging the US’s exceptional economic strengths – its size, resilience, dynamism, and the dollar’s role as the global reserve currency – the agency highlighted the lack of political consensus on fiscal responsibility as a significant risk.
This downgrade comes hot on the heels of Treasury Secretary Scott Bessent’s warning of a potential US default as early as August. Bessent urged Congress to either raise or suspend the debt ceiling, currently at $36.1 trillion, to prevent the government from running out of funds to meet its obligations. The total federal debt has already surpassed this limit, reaching $36.2 trillion, necessitating the use of ‘extraordinary measures’ – accounting maneuvers – to avoid immediate default.
The debt ceiling has been raised multiple times under previous administrations, most recently under President Biden. President Trump, however, has advocated for its complete elimination, arguing that its frequent adjustments render it largely symbolic. The White House, in response to the downgrade, issued a statement criticizing Moody’s credibility and placing blame on the previous administration for the current fiscal situation.
The confluence of a credit rating downgrade and the looming threat of a debt default paints a concerning picture of the US economy. This development has global implications given the dollar’s standing as the world’s reserve currency. The long-term consequences of this situation remain to be seen, but it’s clear that the US faces significant fiscal challenges that require immediate and decisive action from its political leaders.
