The United States lost its AAA rating on Friday amid growing doubts about its government, Congress, and the ability to control increasing deficits and debt in a climate of maximum uncertainty, hostility, and fears of a recession. "This one-notch downgrade on our 21-level rating scale reflects the over a decade increase in government debt ratios and interest payments significantly higher than those of countries with similar ratings," announced credit rating agency Moody's in a surprising statement.
Donald Trump returned to the White House on January 20 with an unprecedented program that included gradually dismantling the State, closing agencies, and laying off tens of thousands of people. But also, declaring a unilateral trade war on the entire planet. The reaction was immediate. First, there were tremors in the stock markets, then more serious movements in public debt markets and capital outflows in currency markets. And now, as in the hottest moments of the 2008-2012 crisis, the credit rating downgrades.
Therefore, tonight, with the stock markets closed for the weekend, the rating agency downgraded the sovereign debt rating of the world's leading power, from the famous and secure AAA, which guarantees lower financing costs, to Aa1. At least maintaining a stable outlook, indicating that there should be no further downgrades in the short term, unless something unexpected happens.
With the downgrade from the highest rating, Moody's follows in the footsteps of Fitch, which did so in 2023, and S&P, which did so in 2011.
"Successive U.S. administrations and Congress have failed to reach an agreement on measures to reverse the trend, and we do not believe that the current fiscal proposals under consideration will result in significant multi-year reductions in mandatory spending and deficits. Over the next decade, we anticipate higher deficits as social benefit spending increases, while public revenues remain virtually unchanged. In turn, the persistence of large fiscal deficits will increase public debt and interest burden. The U.S. fiscal performance is likely to deteriorate compared to its own history and that of other high credit-rated sovereign countries," states the damning report.
The news will unleash the anger of President Donald Trump and inevitably will have consequences on Monday when the Asian, European, and Wall Street markets reopen. Moody's acknowledges the premise that the U.S. "retains exceptional credit strengths," such as the size, resilience, and dynamism of its economy, and the role of the U.S. dollar as the global reserve currency. Furthermore, it explains, "while the recent months have been characterized by some political uncertainty, we anticipate that the U.S. will maintain its long track record of very effective monetary policy, led by an independent Federal Reserve."
But in the same sentence, there is more of a warning to the government than a statement, as Trump has attacked, insulted, and pressured Federal Reserve Chairman Jerome Powell to lower interest rates. In some interviews, he has tried to backtrack by saying he does not plan to dismiss him, something that is probably illegal, but his message is that from 2026 onwards, he will have, by hook or by crook, a more open central bank to listen to him and accommodate his demands. Something that could have devastating effects on the markets.
Congress is currently debating the Budget and fiscal policies that Trump wants to implement, including tax cuts, although the president surprised his supporters by recently opening up to the possibility of raising taxes on the wealthy. The rating agency warns that without serious changes, interest expenses on the debt will increase to represent 78% of total spending by 2035, up from approximately 73% in 2024. "If the Tax Cuts and Jobs Act of 2017 is extended, which is our base scenario, around four trillion dollars will be added to the federal primary fiscal deficit (excluding interest payments) over the next decade," an astronomical amount that many are beginning to question its viability, despite the dollar being the global reserve currency. This administration is dismantling the pillars of the system established in 1944 with the Bretton Woods agreements.
"As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by the increase in debt interest payments, the rise in social benefit spending, and relatively low revenue generation. We anticipate that the federal debt burden will increase to around 134% of GDP by 2035, compared to 98% in 2024," concludes Moody's.