Moody’s Ratings on Friday downgraded the sovereign credit rating of the United States, citing rising debt levels and political dysfunction as key factors influencing its decision. The downgrade removes the final AAA rating among the major credit rating agencies, marking a significant shift in the country’s perceived financial strength.
The move, which brings Moody’s rating for U.S. debt below the highest investment grade, follows similar actions by other credit rating agencies in recent years. Standard & Poor’s downgraded the U.S. from AAA in 2011 during a previous standoff over the federal debt ceiling, and Fitch Ratings followed suit in 2023 citing similar concerns including budget deficits and increasingly polarized governance.
In its announcement, Moody’s pointed to the continued rise in the country’s debt-to-GDP ratio and what it described as an “erosion of fiscal policy effectiveness.” The agency emphasized that ongoing political gridlock in Washington poses a risk to timely debt payments and long-term fiscal management.
The downgrade may have wide-ranging implications for financial markets. Investors typically treat U.S. Treasury securities as among the safest in the world. A lower credit rating could lead to a reevaluation of those assets, potentially increasing yields—that is, interest rates—as compensation for the added risk. Higher yields on U.S. government bonds could in turn translate to higher borrowing costs for businesses and consumers across the economy.
Moody’s also issued a warning that absent significant fiscal reforms, further downgrades could follow. The agency called on policymakers to take action to stabilize the country’s long-term fiscal outlook.
While the Treasury Department has not yet issued a formal comment, administrations traditionally defend the soundness and integrity of U.S. financial obligations in response to such moves.
The downgrade underscores concerns about the sustainability of the federal government’s fiscal path, especially in light of persistent deficits and growing entitlement spending. It also highlights the potential for political standoffs—such as disputes over budget extensions or the debt ceiling—to undermine confidence in the U.S. financial system.
Market analysts will be watching closely in the coming days to see how investors respond, and whether borrowing costs will indeed begin to reflect the new rating levels assigned by Moody’s.
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