Why other countries need to worry about Moody's downgrade more than the US
Washington D.C.: Moody’s Ratings Service on Friday said it is downgrading the U.S.’s creditworthiness in response to an increase in government debt over the past decade and rising interest payments.
Moody’s was the last of the three major credit rating agencies to strip the U.S. of its top-tier “Aaa” rating, lowering it to “Aa1.” Standard & Poor’s downgraded the U.S. in 2011, and Fitch followed in 2023. Now, none of the big three agencies gives the U.S. its highest rating.
Moody’s cited the U.S. government’s escalating debt, now over $36 trillion, and persistent large annual deficits as the primary reasons for the downgrade. The agency warned that federal deficits are projected to rise from 6.4% of GDP in 2024 to nearly 9% by 2035, with the debt-to-GDP ratio potentially reaching 134% by 2035.
A lower credit rating means the U.S. may face higher borrowing costs, as investors could demand higher yields on government debt. This can trickle down to consumers and businesses, potentially raising interest rates for mortgages, credit cards, and loans.
Trump allies called the move “outrageous,” while Democrats blamed Republican-backed tax cuts for worsening the deficit.
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Analysts noted that a U.S. downgrade could have more negative effects on other countries' sovereign debt, since U.S. Treasuries are the global standard. When the U.S. loses its top rating, it may prompt investors to reassess the risk of holding other nations’ debt, especially in emerging markets, and could lead to higher interest rates worldwide.
Countries like China and Japan, which hold substantial amounts of U.S. Treasury securities, are particularly attentive to U.S. fiscal policy and credit ratings. While they remain invested due to the size and liquidity of the U.S. market, downgrades increase their concerns about the long-term value and safety of their reserves.
European officials and markets responded with unease, but also noted their own fiscal challenges. Previous downgrades saw European credit default swap (CDS) spreads rise, indicating increased perceived risk for European debt as well. However, even after a U.S. downgrade, investors often still consider U.S. debt safer than many alternatives
While the downgrade triggered some declines in U.S. stocks and a rise in Treasury yields, the immediate market reaction abroad was measured. Many investors had anticipated the downgrade, and the U.S. dollar’s role as the global reserve currency remains intact.