Moody’s Downgrades USA Sovereign Credit Rating

Moody’s downgraded the sovereign credit rating of the USA from Aaa to Aa1, declaring the Republican budget bill going through Congress as the trigger.

The reason for the downgrade was simple:

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 U.S. 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.

In other words, Republicans’ so-called One Big, Beautiful Bill for budget reconciliation which slashes Medicaid and other services for the majority of Americans to extend enormous tax breaks for the wealthiest pushed Moody’s into this downgrade. The bill will explode the deficit. Budget reconciliation is not subject to the filibuster in the Senate.

Exceedingly rare credit rating downgrades of the USA by major institutions are historically prompted by Republican actions. Previously, they have done it when a Democrat has been President to try to force policy choices when they do not have complete power. This time they are doing it when they have the trifecta of the House, Senate and Presidency.

In 2011 Standard & Poor’s downgraded the USA from AAA rating to AA+. Republicans controlled the House. They used that to block a necessary increase in the debt ceiling and threaten default on the USA’s sovereign debt, which had until then been so unthinkable that it made the USA’s debt a “safe haven” investment. It was a potent weapon against then-President Barack Obama.

S&P said the “effectiveness, stability, and predictability of American policymaking and political institutions” had “ weakened at a time of ongoing fiscal and economic challenges.” It said Republican “political brinksmanship” showed “America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”

In 2023 Fitch Ratings cut the USA’s rating from AAA to AA+. On that occasion, Republicans in Congress repeated the debt ceiling gambit and danger of default as a weapon against then-President Joe Biden. Fitch cited “steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters” that “eroded confidence in fiscal management.”

Lower credit ratings prompt investors to demand higher yields when they buy Treasury debt because it is now regarded as a more risky investment. This means the USA, which has been spending more than its revenue for decades, will have to pay higher interest on its borrowing to cover the shortfall. This will make the shortfall even higher and can eventually force cuts to  expenditures, increased taxes, or both.

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