Moody's Ratings have downgraded the US sovereign credit rate one notch, to Aa1.
Now no ratings agencies have then at AAA, after S&P Global and Fitch earlier cut them.
The Trump tax-cut agenda is set to make the US federal government situation much worse - if it passes Congress.
Moody's had warned the US, but no-one took any action. The one-notch cut comes more than a year after Moody’s changed its outlook on the US rating to negative.
The US federal budget deficit is running nearly -US$$2 tln a year, or more than -6% of GDP/economic activity, and Republicans are pushing through budget legislation that could add trillions more if it passes. This downgrade is on them.
Here is the Moody's statement about the downgrade.
Moody's Ratings (Moody's) has downgraded the Government of United States of America's (US) long-term issuer and senior unsecured ratings to Aa1 from Aaa and changed the outlook to stable from negative.
This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.
Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The US' fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.
The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency. In addition, while recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve. The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period. While these institutional arrangements can be tested at times, we expect them to remain strong and resilient.
The US' long-term local- and foreign-currency country ceilings remain at Aaa. The Aaa local-currency ceiling reflects a small government footprint in the economy and extremely low risk of currency and balance of payment crises. The foreign-currency ceiling at Aaa reflects the country's strong policy effectiveness and an open capital account, reducing transfer and convertibility risks.
A full list of affected ratings is provided towards the end of this press release.
RATINGS RATIONALE
RATIONALE FOR THE RATINGS DOWNGRADE TO Aa1
Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.
Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.
As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024.
Despite high demand for US Treasury assets, higher Treasury yields since 2021 have contributed to a decline in debt affordability. Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns.
While we recognize the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks at Aa1. A number of credit strengths offer resilience to shocks.
The US economy is unique among the sovereigns we rate. It combines very large scale, high average incomes, strong growth potential and a track-record of innovation that supports productivity and GDP growth. While GDP growth is likely to slow in the short term as the economy adjusts to higher tariffs, we do not expect that the US' long-term growth will be significantly affected.
In addition, the US dollar's status as the world's dominant reserve currency provides significant credit support to the sovereign. The credit benefits of the dollar are wide-ranging and provide the extraordinary funding capacity that helps the government finance large annual fiscal deficits and refinance its large debt burden at moderate and relatively predictable costs. Despite reserve diversification by central banks globally over the past twenty years, we expect the US dollar to remain the dominant global reserve currency for the foreseeable future.
Underpinning the rating is our assumption that the US' institutions and governance will not materially weaken, even if they are tested at times. In particular, we assume that the long-standing checks and balances between the three branches of government and respect for the rule of law will remain broadly unchanged. In addition, we assess that the US has capacity to adjust its fiscal trajectory, even as policy decision-making evolves from one administration to the next.
Moreover, the resilience of the US sovereign rating to shocks is supported by strong monetary and macroeconomic policy institutions. Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns, we expect that monetary and macroeconomic policy effectiveness will remain very strong, preserving macroeconomic and financial stability through business cycles.
27 Comments
At least Moody's is being honest.
The catch phrase adjust their fiscal trajectory is really the key here.
& this understatement serve: "Although policy has been less predictable in recent months, relative to what has typically been the case in the US and other highly-rated sovereigns..."
Lol but anyone who tries to cut government spending to reduce the fiscal deficit gets labelled as a Nazi by the political left (or those who appear to want to bankrupt the country for their own short term financial gain - ie those living off the government teat). The times we live in are truely bizarre.
Independent_Observer,
"want to bankrupt the country for their own short term financial gain - ie those living off the government teat)" Perhaps you could expand on that a little. Do you mean those on benefits-the unemployed, the sick, or those billionaires and the companies they run, seek to avoid paying as much tax as possible? You must have heard Warren Buffett saying that he is taxed at a lower rate than his secretary.
Imagine how much extra money there would be if there were no tax havens, if it were considered patriotic to pay tax and to be publicly pilloried for not doing so. I have a little to do with our local foodbank and the demand for their service just keeps growing, now seeing people with full-time jobs. There is real hardship out there and I am pleased that at 80 and long-retired, I still pay a higher rate of tax. Of course there is scope to reduce government expenditure and i would boot out all those 'employed' in PR for a start.
So what is your take on the deficit spend at 6% of GDP? (Something entirely ignored in your reply above).
Or is the problem only the tax take side and not the excessive government spending side in your view?
Like Buffet I think deficit spend should be limited to 2-3% of GDP so we still need to see US government spending slashed significantly.
‘I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection’ - Warren Buffett
Is your argument the US need to government spend even more to improve the living conditions for the poor even though their debt to GDP and deficit to GDP are both dangerously high?
Well it's been 40 years since Neoliberalism entrenched itself, and the people at the bottom have gotten worse off, so more of it isn't likely going to improve things.
But the script is government are useless (which they can at times be), so we'll all be better off by scrapping government and sorting things out by passing out a trillion dollars in tax cuts.
Trouble is, they went from thinking they could slash two trillion bucks, to a trillion, to a final net total of about $30 billion. Or about 1/10th what Elon has lost representing this foolery.
The people at the bottom have certainly got further from those in the middle and those at the top. But they haven't (on average which is what we are discussing) got worse off. When I grew up the children at the bottom were always thin and now they may be obese; the children at the bottom have mobile phones with access to all knowledge - something that the richest rulers could never have dreamed of.
I_O,
I thought you might have been able to read between the lines, but obviously not. Were the very rich and their companies no longer able to game the system, the gap would shrink.
Do you know what the income tax rates were in the US during their golden decades after WW2 and before the neocons got their talons into the UK and US economies?
It doesn't help America is governed by a fascist movement at the moment.
Ironically Hitler wasn't an austere leader.
If the current government is fascist the previous must have been communist if we are going to take things to the same extreme.
The previous govt was a social democracy. Fascism doesn't immediately mean death camps.
Might pay to learn up about this, lest ye be blind to it.
Ok yes history shows that those living in communist states has it good eh? And their suffering was much less that the other political extreme.
Might pay to learn up about this, least he be blind to it (see I can play that game as well).
Some surprisingly shit takes by you today, IO. Boarding a flight so I won’t elaborate.
Except America has never been led by a communist government. I'd even argue it's been a very long time since they've been led by something as left as our Labour government. But we can make a good case for Trumpism representing fascism.
It sounds like you've been lured in by the common trap of disliking some of the same things as them, and being blind to what they're really about.
Fascism means the strength gained by a bundle of sticks when tied together in alignment. It is a great image for trade unionists. The 'Fascism' commenters condemn is a vague memory of the evil actions of Hitler, Franco and other autocratic leaders. Why blame the system instead of the arbitrary behaviour of its leaders? Fascism with a leadership changed every six months might work fine. Socialism led to both North Korea and Denmark so maybe Fascism might work. Start with persuading all citizens to drive on the same side of the road ( everyone gains ) then move on to universal free education, universal pensions and then on to universal child benefit, compulsory voting, compulsory child immunisation, compulsory day of rest, and so on to Fascist paradise.
Fascism sorta mandates longer periods of leadership than a year or two. The law of averages says fascism rarely makes for a better society. The only close example I can think of is Singapore.
It's very hard to get unity of vision from your populace without a strong amount of suppression and coersion.
With any of these systems, much rests on the circumstances inherited. Socialism doesn't lead to North Korea, you get North Korea from the vacuum of the Japanese occupation ending (so there'd been little indigenous leadership for decades), and Korea being carved up between capitalist and socialist powers.
America gets fascism as a response to its many social and structural issues. Trump is a fairly crude and ineffective form of it, but over the coming years we will likely see more refined incarnations.
The law of averages says socialism rarely makes for a better society in an under developed country. That doesn't rule out socialism. Conservative govt's in South America tend to descend into dictatorships or military dictatorships. But that does not apply to conservative govt's in Northern Europe.
I prefer all decisions made as low down the political hierarchy as possible however some decisions have to be made at the top. For example which side of the road we drive on is a classic top decision. So might national exams for school leavers or standards for electric plugs. Or declaration of war.
I have very little problems with deficits. But, it is crystal clear that the US economy is structurally a mess. As in NZ, Govt spending and bank lending pumps new money into the economy, which passes fleetingly through the bank accounts of workers, before being quickly gathered up by the rentier class - the top 1 per cent. The rentier class use their winnings to buy more rent-generating assets, and on we go.
The US consumer economy also relies on huge imports of goods and services (like NZ), which leads to offshore savings in dollars. If the US Govt dropped deficit spending to 3% tomorrow, it wouldn't be the top 1 per cent that would suffer, it would be the millions of workers thrown on the dole as the ecomomy crashed. So, reduce the deficit, yeah, sure, OK, but do it be taking the money back from where it has pooled, not by reducing the spending that is keeping people in the public and private sector employed.
In New Zealand JF the biggest transfer offshore is the NZ Banking system, by implementing a Fannie Mae or Freddy Mac type entity and reducing the interest margin being applied to NZ Housing lenders we could eliminate this transfer, the Gov would have to pump money into Kiwibank etc to provide non housing loans as the major banks would probably leave NZ, New merchant banks may enter to provide more business loans.
There would be Nashing of teeth and squealing but its not going to fix itself unless they are out competed.
Just nationalise the banks already.
But in a Freddie/Fannie model is it the banks taking the risk, or is it the Taxpayer?
If a bank fails now, who steps in to bail them out?
Initially, depositors under the OBR
https://www.rbnz.govt.nz/regulation-and-supervision/oversight-of-banks/…
So that does sound something like a wealth tax then. High incomes are already taxed okish, and the incomes are often offset against acquisition of more assets
They are rather late coming to this conclusion, I guess they have their reasons.
https://edition.cnn.com/2025/05/16/business/moody-us-credit
Of the three major credit rating agencies, Moody’s was the lone holdout, maintaining its outstanding rating of AAA for US debt. Moody’s held a perfect credit rating for the United States since 1917.
It now ranks US creditworthiness one notch below that, at Aa1, joining Fitch Ratings and S&P, which lowered their credit ratings for US debt in 2023 and 2011, respectively.
Well well.... If the US was any other nation it would have been downgraded or even defaulted years ago. Who ever pulls Moodys strings is unhappy at the spending cuts in the ne of halting Govt waste.
What's will this do to the. Most of global debt...?
Seems appropriate they're getting a downgrade, but I'm fairly sceptical of the whole rating industry.
They all rated Lehman Bros as A grade right until they went bust, including Moody's.
About as useful as learning about the day's weather on the 6pm news
https://www.reuters.com/article/markets/funds/moody-s-fitch-slash-lehma…
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