Mint Primer | Moody’s Blues: What US’ credit rating downgrade means for market
Summary
Moody's downgraded the US credit rating to 'Aa1' due to rising debt and political discord. The US debt exceeds $35 trillion, with a projected deficit increase. This downgrade may raise borrowing costs, impacting the economy and Wall Street, although the US economy remains resilient.
For the first time in history, the US does not have a top-tier credit rating from any of the three major rating agencies. Mint takes a look at the latest development and what it means for the world’s largest economy as well as for global markets.
What happened to the US' credit rating?
Ratings agency Moody’s on Friday downgraded the US’ sovereign credit rating by one notch to ‘Aa1’, citing the country’s growing debt amid persistent political bickering. Moody’s had maintained the US’ top-tier rating of ‘AAA’ since 1919. The agency had assigned the country a ‘negative’ outlook in 2023. Its peer, Fitch Ratings, had downgraded the US by one notch to ‘AA+’ from ‘AAA’ in August 2023 due to fiscal deterioration and repeated gridlocks during debt ceiling negotiations in the US Congress. S&P Global Ratings was the first agency to cut US’ triple-A rating way back in 2011.
What prompted the latest downgrade?
The biggest problem is the US’ humongous debt pile, which stood at over $35 trillion in 2024. This compares with the country’s GDP of around $29 trillion. “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," Moody’s said. It expects the federal deficit to widen to nearly 9% of GDP by 2035, up from 6.4% in 2024. It also noted that successive US administrations have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.
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What does this mean for the US?
A lower sovereign rating means the US government may have to pay more for its borrowings, which will have a cascading impact on the broader economy, including higher mortgage rates and consumer loan costs. Many institutional investors who usually buy only AAA-rated securities might look at offloading US Treasuries, which would also lead to a spike in yields and consequently push up interest rates for both companies and consumers.
What will be the impact on Wall Street?
Analysts say while US equities may have a knee-jerk reaction, the downgrade by itself is not likely to be a cause of widespread concern as Washington’s debt addiction is hardly a secret. Everyone was stunned by the first downgrade by S&P in 2011, but even then the market rally resumed after a few weeks.
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Not to forget, despite multiple challenges, the US economy remains resilient as ever. Even Moody’s acknowledged that the US retains exceptional credit strengths such as the size and dynamism of its economy, the role of the US dollar as global reserve currency and its long history of effective monetary policy led by an independent Federal Reserve.
Will this have any impact on Indian markets?
Dalal Street has recently stabilised after a prolonged selloff by foreign institutional investors (FIIs), so any sudden reversal in global investor sentiment will be detrimental for emerging markets like India. Any resumption in selling by foreign investors will put renewed pressure on the equity market as well as rupee. However, this does not seem likely at the moment. The bigger headwind for the domestic market remains US President Donald Trump’s tariff threats, and participants are awaiting a swift resolution on the same. That apart, gold may see another round of safe-haven buying at this juncture, which will extend its record run.
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