"Moody's Downgrades U.S. Credit Rating... Impact Seen as Limited"

Global credit rating agency Moody's has downgraded the United States' sovereign credit rating. On May 19, the securities industry predicted that while this downgrade could increase short-term volatility in global financial markets, its overall impact would be limited. The downgrade had already been anticipated.

On May 16 (local time), Moody's lowered the U.S. credit rating by one notch, from 'Aaa' to 'Aa1'. The rating outlook was revised from 'negative' to 'stable'. Moody's cited fiscal risks as the reason for the downgrade, stating that fiscal deficits and debt are rising, and as interest rates increase, the government's interest payments on its debt have also risen significantly.

However, the securities industry believes that Moody's downgrade will have a limited impact on financial markets. This is because Moody's had already revised the outlook for the U.S. sovereign credit rating to 'negative' in August 2023, and the current adjustment follows that earlier warning.

Park Sanghyun, a researcher at iM Securities, said, "While Moody's downgrade of the U.S. sovereign credit rating could affect the U.S. and global financial markets, the negative impact is likely to be limited," adding, "This is because U.S. fiscal risks have already been well known."

He further explained, "S&P downgraded the U.S.'s top credit rating in August 2011, and Fitch did so in August 2023, so Moody's downgrade is neither new nor an unexpected negative factor. At this point, major risks that could trigger a sharp correction in financial markets, such as tariff risks, have entered a lull, so the impact of the downgrade may not be significant."

Suh Junghoon, a researcher at Samsung Securities, also emphasized, "The downgrade had already been anticipated at the end of 2023, and the reasons for the adjustment are not significantly different from those cited by other rating agencies in their previous downgrades. Therefore, the shock to the market is expected to be more limited compared to previous cases."

Park Sangwoo, a researcher at DB Securities, explained, "While the downgrade of the U.S. sovereign credit rating is symbolically significant, Aaa and Aa1 ratings are treated the same in terms of bank capital regulations and collateral management. Therefore, the technical impact on demand for U.S. Treasuries is limited."

However, in the short term, the downgrade is expected to be a factor that could increase volatility. Ahn Kitae at NH Investment & Securities said, "Given that the KOSPI index has rebounded rapidly from its recent low, Moody's downgrade could serve as a trigger for short-term profit-taking. Even if a short-term correction occurs, expectations for new government policies and for interest rate cuts by the U.S. Federal Reserve (Fed) will likely keep the magnitude and duration of any correction limited."

Ahn Yeha, a researcher at Kiwoom Securities, also commented on the bond market, saying, "Since Moody's downgrade is not a new issue, any increase in short-term volatility is likely to be limited. Until an event emerges that could significantly boost demand for U.S. Treasuries, the market is expected to remain exposed to upside risks from time to time."