(ECNS) -- International credit rating agency Moody's downgraded the U.S. sovereign credit score from AAA to AA1 on Friday over concerns about the nation's growing $36 trillion debt pile, ending its highest rating for the country, maintained since 1917.
With this move, in line with S&P and Fitch, the U.S. has lost its top credit rating from all three major credit agencies.
Reuters cited Darrell Duffie, a Stanford finance professor who was formerly on Moody's board, as saying that this further confirms that U.S. debt is too high, and that Congress must show discipline, either by increasing revenue or cutting spending.
Currently, U.S. federal government debt has surpassed $36 trillion, with about one-quarter set to mature in 2025. To borrow anew to repay the old, the U.S. government will be forced to issue more Treasury bonds. However, with rising yields on U.S. debt, this model is becoming increasingly costly and fragile.
In its report, Moody's warned that the persistently large fiscal deficits of the U.S. will further increase the burden of government debt and interest payments, while the country's fiscal situation is likely to deteriorate.
In 2024, the U.S. federal fiscal deficit accounted for 6.4% of GDP. Moody's projects this ratio will rise to 9% by 2035, running counter to Treasury Secretary Janet Yellen's goal of reducing the deficit-to-GDP ratio to 3%.
Due to the high proportion of mandatory spending on social security and veteran benefits, along with the continued rise of nondiscretionary interest payments on debt, the flexible portion of the U.S. federal budget is being increasingly shrunk.
Moody's estimates that if taxes and spending are not adjusted, by 2035 these two types of mandatory expenditures will account for 78% of total federal spending, leaving policymakers with very limited room for adjustment.
Even more troubling is the growing political polarization within the U.S., which has made fiscal reform difficult.
When Fitch downgraded the U.S. credit rating in 2023, several Democratic officials insisted that then-President Biden should not be blamed for the actions of his predecessor, Donald Trump. Meanwhile, Republicans pointed the finger at Bidenomics as the root cause of the downgrade.
Today, despite a reversal in the political roles of the two parties, partisan bickering continues without any meaningful change.
Long-term political polarization in the U.S. has stalled fiscal reform. The two parties remain divided and unable to agree on how to reverse the rising trends of fiscal deficits and interest costs, Wang Youxin, a senior researcher at the Research Institute of Bank of China, told China News Network.
Capital markets don't have the luxury of waiting for political consensus.
Following Moody's downgrade, yields on U.S. Treasury bonds, long considered the world's risk-free benchmark, jumped sharply, with the 10-year yield rising above 4.5% and the 30-year yield briefly touching 5%.
Max Gokhman, deputy CIO of Franklin Templeton Investment Solutions, warned that as major investors begin gradually shifting away from U.S. Treasury bonds toward other safe-haven assets, the U.S borrowing costs will rise. This could push Treasury bond yields into a dangerous bear market spiral, while also reducing the appeal of U.S. equities.
On Monday, Chinese Foreign Ministry spokesperson Mao Ning stated that "the U.S. should apply responsible policy measures to keep the international financial and economic systems stable and protect investors' interests."
On the surface, the situation appears to be a downgrade of a sovereign credit rating. But at a deeper level, it reflects the eruption of a trust deficit crisis, an expression of market distrust toward the U.S. for its long-standing neglect of financial risks and reliance on excessive borrowing to govern.
It's time for the U.S. to break its addiction to debt.
(By Gong Weiwei)
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