Moody's Abruptly Downgrades U.S. Sovereign Credit Rating
$52 Trillion Federal Debt Cited
U.S. Loses Top Credit Rating from All Three Major Agencies
Despite "Limited Shock" Outlook, Fears of U.S. Treasury Sell-Off Grow
U.S. Treasury: "A Lagging Indicator of Biden Policies"
Global credit rating agency Moody's has abruptly downgraded the United States' sovereign credit rating from the highest level, Triple-A, citing a surge in federal government debt. As a result, the U.S. has lost its top-tier rating from all three major credit rating agencies. Following the shock of President Donald Trump's tariff policy, concerns are mounting that the downgrade could reignite "Sell America"?a broad sell-off of U.S. assets, including Treasuries. The Trump administration has blamed the downgrade on former President Joe Biden's administration, denouncing it as a political decision.
U.S. Federal Debt Hits $52 Trillion... All Three Major Rating Agencies Strip Top Credit Rating
On May 16 (local time), Moody's downgraded the U.S. sovereign credit rating from the top grade 'Aaa' to 'Aa1'. This downgrade came about a year after Moody's revised its outlook for the U.S. sovereign credit rating from 'stable' to 'negative' in November 2023. Moody's has now changed the outlook for the U.S. rating from 'negative' back to 'stable'.
With this move, the U.S. has lost its top credit rating from all three major agencies. Previously, Fitch downgraded the U.S. rating from 'AAA' to 'AA+' in August 2023, and Standard & Poor's (S&P) also lowered its rating from 'AAA' to 'AA+' in August 2011.
Moody's cited the surge in U.S. federal government debt as the reason for the downgrade. Moody's stated, "This one-notch downgrade reflects the government's debt and interest payment ratios, which have risen to significantly higher levels than those of similarly rated countries over the past decade." The agency added, "While we recognize the substantial economic and fiscal strength of the United States, this is no longer sufficient to fully offset the deterioration in fiscal indicators."
As of May 15, U.S. federal government debt stood at approximately $36.22 trillion (about 52 quadrillion won). The national debt-to-GDP ratio reached 123% as of last year. Because federal government spending has consistently exceeded tax revenues, the U.S. has run persistent fiscal deficits, funding the gap by issuing government bonds, causing the national debt to balloon. Mandatory spending on social security and healthcare services, as well as interest payments on government bonds, have surged. The fiscal deficit also soared as the government undertook massive stimulus measures during the COVID-19 pandemic.
In addition, concerns are growing that fiscal deficits will worsen further as President Trump pushes for income and corporate tax cuts. While President Trump claims that tariff hikes can offset the revenue shortfall, critics point out that tariffs account for only 2% of total tax revenue, making this claim unrealistic.
Moody's criticized, "The U.S. administration and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and surging interest costs," and added, "Current fiscal policy proposals under discussion are unlikely to lead to substantial reductions in mandatory spending and deficits over the coming years."
The fiscal outlook for the U.S. federal government remains bleak. Moody's projects that the federal deficit-to-GDP ratio will rise from 6.4% in 2024 to 9% in 2035, and the federal debt ratio will jump from 98% to 134% over the same period.
Wall Street: "Limited Shock" vs. "Sell America Accelerates"... U.S. Treasury: "A Lagging Indicator of Biden Policies"
Wall Street is closely watching whether Moody's downgrade of the U.S. credit rating will trigger financial market turmoil, such as a sell-off of U.S. Treasuries. While some market participants believe that the U.S. debt risk is severe but already widely known?suggesting limited market impact?others warn that the downgrade could reignite instability in the Treasury market, which had already been shaken by tariff policies, and accelerate a renewed "Sell America."
Thomas Thornton, founder of hedge fund Telemetry, said, "This move by Moody's will have a negative impact across the U.S. markets," expressing concern that "the biggest risk is that Treasury yields will rise faster and more sharply."
Max Gokhman, Vice President and Chief Investment Officer (CIO) at Franklin Templeton, warned, "The (tax cut) plans currently being discussed in Congress will further accelerate the fiscal deficit, making the downgrade inevitable." He added, "As investors gradually shift from Treasuries to other safe assets, debt servicing costs will continue to rise, leading to a dangerous decline in Treasury prices, additional downward pressure on the dollar, and reduced attractiveness of U.S. equities."
On the other hand, some believe the market shock will be limited. Kim Forrest, CIO of Bokeh Capital Partners, said, "The downgrade of the U.S. credit rating may serve as a warning, but it's not the first time," adding, "Bond investors are fully aware of the debt issue," and predicting that the market impact will be limited.
The Trump administration criticized the downgrade as a political decision and blamed former President Biden.
U.S. Treasury Secretary Scott Besant said in an interview with NBC News on May 18, "I consider Moody's move to be a lagging indicator," claiming that the downgrade is related to spending policies from the Biden administration, such as climate change response and expanded healthcare coverage.
White House Communications Director Stephen Cheong criticized Moody's Analytics economist Mark Zandi, saying, "No one takes his analysis seriously," and "He has been proven wrong repeatedly." Although Zandi has consistently warned about the U.S. debt problem, he was not involved in the preparation of this report.
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