On Friday, one of the world’s foremost sovereign credit rating agencies, Moody’s, announced it was downgrading the United States’ credit rating from its perfect “AAA” rating to “Aa1.” Moody’s had been a holdout among the top rating firms, which had already stripped the United States of its top rating in 2011 and 2023. This announcement came just after Donald Trump’s “big, beautiful” spending bill initially failed to clear the Senate, thanks in part to Republican lawmakers demanding tax cuts.
As with previous downgrades, financial markets deemed Moody’s decision to be largely meaningless. There is, however, reason to believe the United States’ credit worthiness now matters. It doesn’t mean that the government is anywhere close to defaulting on its obligations, but it may signal a fundamental shift of sentiment regarding America’s role in the world economy.
At first glance, the indifference (and derision) with which markets met the downgrade seems justified. Moody’s hasn’t told investors anything they didn’t already know. While countries with lower credit ratings do face overall higher borrowing costs, the spread between yields on US bonds and those of other advanced economies already reflect the higher risk premia (additional borrowing costs) of the current fiscal outlook. That is, bond markets had already “priced-in” the slightly higher default risk supposedly conveyed by the new credit rating.
More importantly the one-notch downgrade doesn’t matter from a financial risk perspective. The debt-to-asset ratio…
Auteur: Dominik A. Leusder
