For the first time in over a century, the United States has lost its top-tier credit status from all major rating agencies, as Moody’s Ratings, on Friday, downgraded the US government’s credit rating by one notch, highlighting deepening concerns over the nation’s fiscal stability.
Moody’s downgraded the US government’s credit rating from AAA to AA1 on May 17. This marks a significant shift in the nation’s financial standing and placing it on par with other advanced economies that carry lower debt ratings.
The downgrade comes nearly four months after Donald Trump returned to power as the President for the second time.
Moody’s cited the US government’s prolonged failure to manage its rising debt burden as a key reason for the downgrade.
The agency pointed to more than a decade of growing federal debt and increasing interest payment ratios, now significantly higher than those of similarly rated sovereigns.
Moody’s noted that repeated fiscal mismanagement by successive administrations has contributed to the decision, according to a Newsweek report.
However, despite the downgrade, the agency emphasised the continued strengths of the US economy, including its size, resilience, and the dominant global role of the US dollar as a reserve currency, as reported by the Associated Press.
The ratings agency projected a grim outlook for federal deficits, expecting them to expand to nearly 9% of the US economy by 2035, up from 6.4% in 2024. This increase is attributed primarily to rising interest payments, growing entitlement obligations, and comparatively weak revenue generation.
Moody’s also warned that the proposed extension of the 2017 Trump-era tax cuts — a current legislative priority for the Republican-led Congress — would add an estimated $4 trillion to the federal primary deficit over the next decade, as per Newsweek.
The collective downgrades suggest increasing concern over the erosion of fiscal discipline in the United States. Here’s a look at the past credit rating downgrades by Fitch and S&P:
Rating downgrades in 2011 and 2023
In August 2023, Fitch Ratings downgraded US long-term debt from AAA to AA+, citing political gridlock over the debt ceiling and fiscal instability.
Following the rating downgrade, the key US stock indices and global markets stumbled overnight, according to the CNN report.
According to Fitch, the downgrade reflected the “expected fiscal deterioration” of the country over the next three years, the CNN report added. The rating agency cited the “high and growing” government debt, which stood at over $32 trillion.
S&P was the first to take such action in 2011, also citing concerns over federal debt and partisan brinkmanship, prompting sharp criticism from the US Treasury at the time, CNN had reported.
“We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating. We have also removed both the short- and long-term ratings from CreditWatch negative,” the rating agency said.
The steps taken by the government would fall short of the amount needed to stabilise the debt burden, the rating agency outlined in its report.
“The prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade,” the agency mentioned in its report.
Also Read: Why the RBI dividend this year may be eye-popping