Moody’s Downgrades US Credit Rating Over Mounting National Debt
| 2025-05-17
Moody’s Downgrades US Sovereign Credit Rating Amid Growing Debt Concerns
Moody’s lowers the US credit rating from Aaa to Aa1, citing rising debt and persistent fiscal deficits; outlook revised to stable.
Moody’s Investors Service has downgraded the United States' long-standing sovereign credit rating, citing the country's escalating debt burden and continued fiscal deficits. The agency reduced the rating by one notch from the highest “Aaa” to “Aa1” and revised its outlook from negative to stable.
The decision, announced on Friday, reflects what Moody’s described as a lack of effective measures to address structural fiscal challenges. It marks the first time since 1919 that Moody’s has downgraded the US, making it the final major credit rating agency to do so following similar actions by Fitch Ratings and Standard & Poor’s in recent years.
Rising Debt Triggers Concern
Moody’s said the downgrade was driven by growing concerns over the United States' projected debt trajectory, with the national debt now approaching $36 trillion. The agency warned that interest payments and annual deficits are increasing at a pace that threatens long-term fiscal sustainability.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s stated.
The credit agency forecasts that federal government debt could reach approximately 134% of gross domestic product (GDP) by 2035, a sharp rise from an estimated 98% in 2024. Analysts suggest that this trajectory places further strain on the government's ability to maintain investor confidence without significant policy reforms.
Impact on US Economic Policy
Since taking office on 20 January, President Donald Trump has reiterated a commitment to balancing the federal budget. Treasury Secretary Scott Bessent has also emphasised the administration’s intention to reduce borrowing costs. However, proposals aimed at curbing spending and boosting revenues have yet to reassure markets or rating agencies.
According to Moody’s, current fiscal policy discussions are unlikely to result in the kind of long-term deficit reduction necessary to stabilise the country’s financial position. The agency added that while the US retains strong underlying creditworthiness, its fiscal outlook has weakened materially.
Market Response
The downgrade was announced after US financial markets closed on Friday. Nonetheless, yields on government debt responded swiftly. The yield on two-year Treasury notes rose by two basis points to 3.993%, reaching a session high of 4.012%. Yields on 10-year benchmark notes also reversed earlier losses, climbing to 4.499%.
Investors closely monitor ratings from the three major agencies—Moody’s, Fitch Ratings, and Standard & Poor’s—as these assessments influence global borrowing costs, investment decisions, and perceptions of sovereign risk.
Previous Downgrades by Other Agencies
Moody’s downgrade follows Fitch Ratings’ similar move in August 2023, when it reduced the US rating to reflect what it called “expected fiscal deterioration” and the recurring risk of debt ceiling standoffs. In 2011, Standard & Poor’s was the first to strip the United States of its top-tier rating after a prolonged political dispute over the debt ceiling.
Although the US continues to enjoy robust demand for Treasury securities, the repeated warnings from credit agencies highlight the growing scrutiny over its fiscal policy trajectory.
Context: Sovereign Ratings and Global Implications
A sovereign credit rating is an independent evaluation of a country’s ability to meet its financial commitments. Lower ratings can lead to higher borrowing costs and potentially reduced investor confidence, though the impact often depends on broader market dynamics.
The United States remains the world’s largest economy, and US Treasury bonds continue to serve as a global benchmark for safe assets. Nevertheless, prolonged increases in debt levels may challenge this status over time.
Moody’s announcement underscores ongoing concerns about the sustainability of public finances in advanced economies, especially amid rising interest rates and political challenges to fiscal consolidation.
While Friday’s downgrade is not expected to lead to immediate financial instability, it adds pressure on US policymakers to address long-term budgetary issues and prevent further erosion of fiscal credibility.
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