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The writer is president of Structured Credit International Corp and a former senior vice-president at S&P during the Latin American debt crisis
Donald Trump just earned a dubious distinction: for the first time in more than a century, the US holds no AAA credit rating from any major agency. Moody’s downgrade of the US to Aa1 last week stripped the country of its last Triple-A.
Following S&P Global Ratings’ historic downgrade in 2011 and Fitch’s similar cut in 2023, the Moody’s decision delivers an unwelcome verdict on US finances — and it lands squarely at President Trump’s doorstep.
Each of the “big three” ratings downgrades stems from the same fundamental issue: chronic fiscal mismanagement driven by political paralysis. The S&P’s downgrade in 2011 came after a bitter debt-ceiling fight and a deficit reduction plan it deemed inadequate, amid intense political polarisation and lack of a credible fix.
Fitch’s action in 2023 warned of a steady deterioration in US governance and perennial debt-limit brinkmanship. Moody’s now adds its alarm that despite a decade of rising debt and persistent deficits, Washington has limited budget flexibility. Entitlement spending is climbing, tax revenues lag, and neither party is willing to compromise. The agencies’ message is clear: America’s partisan stalemate and policy uncertainty has serious financial consequences.
Past downgrades failed to scare off investors — in 2011, Treasuries paradoxically rallied after S&P’s cut, and Fitch’s 2023 move had little lasting impact on US bond yields.
This time around we have seen a jump in yields on 30-year US Treasuries to above 5 per cent, eclipsing a recent peak hit during the gyrations that followed Trump’s dubious “liberation day” announcement of tariff increases.
As long as the US government keeps honouring its obligations, Treasury debt will retain its quasi status as a “risk-free” benchmark. All three agencies currently assign a stable outlook to the US, signalling no immediate further downgrades. But Moody’s has warned that if debt metrics or governance deteriorate further, another rating cut is possible. In short, the White House is on the hook to prevent a sharper drop in creditworthiness.
Politically, Moody’s verdict has intensified the blame game in Washington. Democrats claim it vindicates their warnings about Trump’s fiscal policies — Senate Democratic leader Chuck Schumer called it a “wake-up call” to stop Republicans’ “deficit-busting tax giveaway”. Republicans retort that overspending — not tax cuts — is the real culprit, and some dismiss the downgrade as an overreaction by rating agencies.
It is a replay of past showdowns. After S&P’s 2011 cut, each political side pointed fingers. The Obama administration also sued S&P in 2013 over its errors during the financial crisis, leading to $1.5bn payment by the credit agency to settle the suits. And after Fitch’s 2023 downgrade, Biden officials blasted the move as “arbitrary”.
The uncomfortable truth is that both parties have a hand in America’s burgeoning debt, yet neither supports a lasting solution. “Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits,” Moody’s said in its rating downgrade “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.”
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Structural dysfunction — entrenched polarisation and perpetual brinkmanship — makes serious fiscal reform virtually impossible. The dysfunction persists. Without a bipartisan grand bargain on spending and revenues, the nation’s fiscal trajectory will worsen, no matter who occupies the Oval Office.
One big reason US borrowing goes unpunished is the dollar’s unrivalled role as the world’s reserve currency. But the share of international reserves held in dollars has declined from near 80 per cent in the 1970s to below 60 per cent. Moody’s acknowledges that the dollar’s dominance as a reserve asset gives US extraordinary financial flexibility.
Even after past downgrades, global investors continued to buy US debt, seeking its safety, underlining that there still is no significant alternative to US Treasuries’ depth and liquidity. But that cushion is not foolproof nor forever. Each debt ceiling scare and each credit warning chips away at confidence in US stewardship.
Losing AAA status across the board is a symbolic blow to American prestige. It should spur Washington to get its fiscal house in order before faith in the dollar — and the nation’s financial exceptionalism — erodes in earnest.
