Moody’s lowers US credit rating for the first time due to: “increased interest payments on debt and rising entitlement spending”

Though a little late to the party, Moody’s has reached the same conclusion as its competitors, S&P Global and Fitch Ratings, and downgraded the US’ credit rating from AAA to Aa1. S&P knocked one notch off the US credit rating in 2011, following the 2008 financial crisis. Fitch did so in 2023, over concerns about the debt ceiling and the growing unwillingness among some GOP members to vote against increases.

Moody’s uses a twenty-one-unit system in its rating system; the single unit deduction was meant to highlight its distrust of the US government’s ability to manage its fiscal trajectory and control rising debt and interest costs.

How does Moody’s structure its credit rating?

Moody’s uses a twenty-one-unit system in its rating system; the single unit deduction was meant to highlight its distrust of the US government’s ability to manage its fiscal trajectory and control rising debt and interest costs.

Moody’s system of evaluating creditworthiness is based on a twenty-one-point scale where AAA is the highest rating available, and C is the lowest.

Why does the US have a credit rating?

Like other countries, the US has a credit rating because the debt it owes can be sold with interest to other governments or private financial institutions with an associated interest rate. Instead of paying itself back, the US pays part of its debt to those domestic and foreign holders of their debt. The credit rating is a market signal of the reliability of the debtor to repay its debt obligations, with those that are more likely to repay having higher credit ratings than those where more risk exists.

What does it mean that the credit rating has gone down?

The fact that Moody’s took the step to decrease the US credit rating means that the firm is less confident in the ability of the US government to pay its debts.

“While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” explained Moody’s statement detailing the decrease.

Moody’s also added that the downgrade had been “driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.” In other words, the country’s growing deficit made it a riskier investment. The deficit is the difference between the total money taken in by the government, through taxes and fees, and the total allocations appropriated by Congress.

However, one should remember that the decrease was small, with the US only losing one point of the 21-point system.

How does the US Moody’s rating compare to that of other countries?

After the US fell to an AA1 rating, there are only 11 countries that hold the top rating:

Now that the US has been knocked down a peg by Moody’s, it joins the likes of Austria and Finland.

The White House lashed out at Moody’s for the downgrade, blaming the worsened state of the economy on the Biden administration and claiming that they were trying to solve the economic problems left behind. Nevertheless, the inability of Republicans in Congress to pass a budget, when they control both chambers and the White House, gives investors pause. Fitch had decreased the US credit rating in 2023, citing concerns that there could come a moment where leaders on Capitol Hill fail to increase the debt limit, leading the country to default.

Likely, the reconciliation bill the GOP is attempting to pass, dubbed the “big beautiful bill” by President Trump, will include an increase to the debt ceiling. If no such provision is included, the risk of defaulting could grow even greater, though the GOP would likely turn to Democrats to avoid such a catastrophic outcome. Currently, members of the Freedom Caucus are holding up the bill, arguing that it does not cut spending enough and will lead to further increases in the deficit. Since Republican Congressional leadership has refused to negotiate with Democrats, they cannot rely on their votes to pass the package. The uncertainty around future debt limit increases is one of the concerns voiced by Moody’s, along with high interest rates paid on the country’s debt, which are leading the total amount owed to decrease at a much more rapid pace than it was before the pandemic.

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