US Credit Downgrade: Rising Debt Sparks Moody’s Alarm

SYNOPSIS

For the first time in history, all three major credit agencies have downgraded U.S. sovereign debt, citing ballooning deficits, soaring debt, and political paralysis. With Treasury yields spiking and investor confidence shaken, this marks a historic warning for America’s fiscal future.

Understand how Surging U.S. debt puts credit rating at risk as Moody’s sounds the alarm.

Last month saw Moody's removing the very last AAA-rank it had ever ascribed to US long-term sovereign debt, downgrading its rating from AAA to AA1 for the first and only time ever in the history of all three major credit-rating agencies. The decision showed increasing concern about record-level federal deficits, a ballooning national debt, and ongoing political gridlock in Washington, all of which investors fear could destabilize markets.

1. Reasons Behind the Rate Cut & Its Market Impact

The agency listed several interrelated concerns:

• Increasing debt obligations: With the national debt standing at around $36 trillion and projected to be around 134% of GDP by 2035, fiscal pressures are mounting

• Widening budget deficits: With annual federal deficits showing no signs of slowing and potentially hitting 9% of GDP by 2035, these deficits are largely attributable to rising interest costs and entitlement growth, coupled with lukewarm revenue growth

• Deadlock: The repeated failures by Congress under successive administrations and all other parties have fatally diminished confidence in US fiscal management.

Markets responded swiftly to the news: Treasury yields in the US soared amid uncertainty, and longer-term interest rates have surged, thus pushing borrowing costs up not only for the federal government itself but also for companies and American households.

2. Loss of AAA+ Status

Moody’s downgrade means the US now carries no AAA credit rating from any of the all-powerful trio of major rating agencies: Standard & Poor's (2011), Fitch (2023), and now Moody's. The loss of the AAA+ status is very serious, both technically and psychologically, as it challenged the longstanding investor faith. Fiscal oversights have drained some bits of the “risk-free” rating from the American financial ecosystem, resilience, and reserve-currency status.

3. Moody’s Severe Warning for America

Moody's did more than the rating downgrade; it has issued a stern warning. Currently, lawmakers are deliberating on a sweeping “Big Beautiful Bill” marked by widespread financial concessions and spikes in spending, it has set off alarm bells that it may add trillions to the debt burden over the next decade. Moody’s in its own words: successive administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs, thereby posing a serious risk to America’s credit standing.

While markets reacted with limited immediate fallout since investors had anticipated to some extent the downgrade, Moody's downgrade still remains a wake-up call. It is an urgent call for sustainable fiscal stewardship and meaningful debt reduction. Structural reform, without which the US would be on a course to undermine the very economic foundations that have underpinned its global credibility.

Nirav Jain