Moody’s downgrade signals rising alarm over US debt

International credit rating agency Moody’s has dealt a blow to the US with a downgrade, warning about rising levels of government debt and a widening budget deficit.The downgrade has exacerbated investor worries about a looming debt time-bomb that could spur bond market vigilantes who want to see more fiscal restraint from Washington.Moody’s cut America’s pristine sovereign credit rating by one notch, the last of the major agencies to downgrade the country.The US national debt is currently about $36tn. It’s the equivalent of about $106,100 for every single person in the country, according to the Peter G Peterson Foundation, a research group.S&P Global Ratings downgraded the US back in 2011, and Fitch Ratings did so in 2023.Debt interest costs have been swallowing a growing chunk of government revenues since the era of ultra-low rates vanished in a wave of inflation.Moody’s said federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021.The federal government spent in excess of $1.8tn more than it received in the aa2024 fiscal year, marking the fifth year in a row of fiscal deficits above $1tn.Moody’s had flagged as far back as November 2023 that it might lower the US credit rating, when it changed its outlook on the rating to negative from stable.The Aa1 rating now given to the US by Moody’s is its second-highest rating, and is equivalent to the AA+ sovereign grade assigned to the nation by Fitch and S&P.Moody’s describes Aa1-rated debt as still high in quality and subject to very low risk, compared with its highest-quality AAA rating, which has minimal risk.US federal tax revenue has failed to keep pace with government spending — especially since the Global Financial Crisis and the coronavirus pandemic, which triggered deep recessions and prompted governments to push through costly economic stimulus packages to sustain employment and investment.Since the 1980s, various US administrations enacted waves of tax cuts as a way to encourage economic activity and boost the personal finances of voting taxpayers, yet failed to curb government spending to make up for the lost fiscal income.The role of the dollar as the world’s reserve currency, and the preferred unit of exchange for a large proportion of global trade, has helped to keep a lid on US borrowing costs even as federal deficits ballooned.A rating from a credit scorer is meant to be an independent appraisal of an entity that sells debt.Ratings companies assess the financial strength of borrowers and give them scores ranking their ability to meet debt payments.Investors often rely on credit ratings when making decisions around purchasing new debt from the issuer, so the ratings can play an important role in determining how much interest a borrower needs to pay to raise funds in capital markets.The US federal government benefits from a reputation of not having defaulted on its debts and is still viewed as highly unlikely to do so. Asked about the Moody’s downgrade during an interview, US Treasury Secretary Scott Bessent said, "Moody’s is a lagging indicator — that’s what everyone thinks of credit agencies.”The downgrade from Moody’s, which follows similar moves from Fitch in 2023 and Standard & Poor’s in 2011, will "eventually lead to higher borrowing costs for the public and private sector in the United States,” according Spencer Hakimian, founder of Tolou Capital Management in New York.Even so, the ratings cut is unlikely to trigger forced selling from funds that can only invest in top-rated securities, says Gennadiy Goldberg, head of US rates strategy at TD Securities, as most funds revised guidelines after the S&P downgrade.