The United States could face new market turmoil this week, after Moody’s Investors Service revoked the country’s last triple-A rating. They cited an unsustainable fiscal path and a lack of political consensus in order to address mounting debt.
The downgrade announced on Friday is the final blow by the three major rating agencies. S&P had already cut its ratings in 2011 and Fitch did so in 2023. This comes amid increasing alarm over the national debt of $36 trillion and the persistent budget deficits.
Moody’s has lowered its rating to AA1 from AA and issued a warning about the long-term fiscal decline.
Concerns about deficits and political gridlock are growing
In its statement Moody’s emphasized the lack of credible measures taken by successive US administrations to reduce the soaring deficits.
“Successive US Administrations and Congress have not agreed on measures to reverse this trend of large annual deficits and rising interest costs. Moody’s stated that it did not expect any material multiyear reductions to mandatory spending or deficits from the current fiscal proposals.
The agency stated that it expects a larger deficit as entitlement spending increases while government revenues remain flat.
“A persistent, large fiscal deficit will increase the government’s debt burden and interest rate.”
The downgrade comes at a politically charged moment.
Right-wing lawmakers blocked President Donald Trump’s latest proposal for a tax bill, dubbed the “one big beautiful bill”, last week. However, it still poses a fiscal threat.
Economists warn making Trump’s tax cuts permanent will add trillions of dollars to the deficit in time.
Treasury Secretary Scott Bessent played down the downgrade in an interview with NBC’s Meet the Press. He called Moody’s a lagging indicator.
The shift has brought into sharper focus the fragile balance between the economic growth, fiscal credibility and political partisanship.
Will the markets fall on Monday?
Early signs suggest that the immediate reaction of the market to Moody’s downgrade may be less dramatic than previous downgrades.
US stock futures predicted that the markets would fall by about 1% on Monday morning when trading began in the United States.
According to IG analyst Tony Sycamore, Nasdaq futures dropped 0.38% while gold ticked up by 0.27% during weekend trading.
In Asia, the Kospi in South Korea and Taiwan’s Taiex fell each more than 1%, while Tokyo’s and Hong Kong’s markets declined by around 0.5%.
The US dollar continued to weaken against the euro and the yen. Meanwhile, treasury rates rose, with the 10-year bond reaching 4.51% at the start of Asian trading. This is up from 4.44% last Friday.
Investors expect further upward pressure on yields, as buyers will demand higher compensation due to perceived risk.
Tracy Chen, Brandywine Global, said that there may be more pressures to sell.
The downgrade could indicate that investors will be demanding higher yields on Treasury bonds.
Others believe that regulatory rules and central banks operations will limit the impact.
Toby Nangle noted that assets rated AA1 are treated the same as triple-A assets for capital adequacy.
He wrote in the Financial Times that “from a mechanical standpoint, the downgrade is almost certain to not matter”.
The debate over credibility and consequences intensifies
The downgrade has also reignited tensions between the two parties.
Steven Cheung, White House Communications Director, criticised Moody’s and claimed that Mark Zandi – often quoted by the press – had political motives.
Cheung said that “He has been a Never Trumper ever since 2016”.
Zandi, however, is affiliated with Moody’s Analytics. This entity is separate from the credit rating division.
Some in the financial world remain skeptical that this downgrade will change the fundamental status of US Debt.
Stephen Innes, SPI Asset Management, said: “Let’s be real.”
“If there is one asset on the planet with the lowest chance of default, then it’s an US Treasury bond.”
Innes and other commentators note that the United States continues to print the primary reserve currency of the world and issue debt in a currency they control.
“It is not moral hazard, it is just an operational fact,” said he.
Outlook uncertain amid fiscal strains and political inertia
The downgrade could have implications beyond Washington.
Analysts warn that attention may soon be focused on other heavily indebted countries, such as Japan. Japan’s debt-to GDP ratios are among the highest of any country in the world.
The move could force global investor to reassess the sovereign risk more widely, especially in a climate of high global interest rate.
The downgrade could further limit Washington’s flexibility, especially with the presidential elections approaching and the lawmakers in a budgetary impasse.
Investors and analysts are watching closely for signs of greater financial stress in the coming weeks. Or, if markets simply absorb the shock and move on, as some believe, they will be watching.
Moody’s action, regardless of its near-term impact on the markets, highlights the long-term risks that are posed by political stagnation and rising debt.
This post Moody’s downgrades US Credit Rating: What to expect on Monday? This post may be updated as new information unfolds
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