Moody’s Downgrades U.S. Credit Rating: First Time All Major Agencies Cut America’s Status

Key Points

• For the first time ever, all three major rating agencies-Moody’s, S&P, and Fitch have downgraded the U.S. credit rating below the top tier.
• Moody’s cut the U.S. sovereign rating from Aaa to Aa1 due to surging debt, persistent deficits, and political gridlock.
• U.S. debt has soared to $36 trillion, with interest payments and deficits projected to climb further.
• The downgrade triggered a sell-off in U.S. stocks, bonds, and the dollar, raising concerns about higher borrowing costs.
• Global markets and emerging economies like India could face ripple effects if U.S. borrowing costs rise or investor sentiment shifts.

New Delhi: In a historic move, Moody’s Investors Service has downgraded the United States’ sovereign credit rating from the highest Aaa to Aa1, marking the first time in over a century that all three major agencies-Moody’s, Standard & Poor’s, and Fitch-country’s ballooning $36 trillion debt, persistent budget deficits, and a lack of meaningful fiscal reforms in Washington.

Moody’s had maintained the U.S.’s perfect rating since 1917, outlasting S&P’s cut in 2011 and Fitch’s downgrade in 2023. The agency cited “continuous fiscal deficits, rising interest costs, and political deadlock” as key factors behind its decision, warning that the U.S. fiscal outlook is deteriorating compared to other advanced economies.

“Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly,” Moody’s stated.

What Triggered the Downgrade?

• Debt Explosion: U.S. government debt has surged to $36 trillion, with federal deficits and interest payments rising faster than economic growth.
• Political Gridlock: Moody’s and other agencies flagged the inability of successive administrations and Congress to agree on credible plans to cut spending or raise revenues, making long-term fiscal reforms unlikely.
• Rising Borrowing Costs: As a result of higher debt and deficits, investors now demand greater yields to hold U.S. Treasurys, which puts upward pressure on government and private sector borrowing costs.

Immediate Market Impact

The downgrade triggered a broad sell-off in U.S. assets. Stocks, the dollar, and government bonds all declined as investors reassessed risks. The yield on the benchmark 10-year Treasury note rose to 4.51%, and gold prices spiked as investors sought safer assets. While some analysts expect the market impact to be short-lived, others warn that continued fiscal instability could erode confidence in U.S. debt over time.

What Does This Mean for the U.S. and Global Economy?

• Higher U.S. Borrowing Costs: The government will likely pay more to finance its debt, with interest payments projected to consume up to 30% of federal revenue by 2035.
• Potential Global Ripple Effects: U.S. Treasurys are a cornerstone of global finance. If investor confidence weakens, it could trigger higher yields worldwide, impact global stock and bond markets, and raise borrowing costs for other countries, including emerging economies like India.
• Currency and Capital Flows: The downgrade could put downward pressure on the U.S. dollar and prompt global investors to diversify into other assets, affecting capital flows into markets like India.

Outlook: Still Strong, But No Longer “Risk-Free”

Despite the downgrade, the U.S. retains significant strengths: a large, dynamic economy and the dollar’s status as the world’s reserve currency[4][9]. However, the loss of its last triple-A rating is a wake-up call for policymakers and a signal to global investors that even the world’s largest economy is not immune to fiscal risks.

Summary Table: U.S. Credit Rating Downgrades

The U.S. now faces higher borrowing costs and increased scrutiny from global investors, with potential ripple effects for financial markets worldwide.