Any action movie must include a scene where the lead strolls towards camera and doesn’t even flinch as the building in the background explodes into the sky.
And 116-year old ratings agency Moody’s kinda did that on Friday, strolling towards the weekend while its grenade exploded with news that it was downgrading US debt from AAA to AA1, leaving the US without a major AAA rating for the first time in a century.
Why? Over the past decade, Moody’s noted:
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- a) “federal spending has increased“,
- b) “tax cuts have reduced government revenues“, and
- c) political dysfunction means this trend is “likely to deteriorate”.
This wasn’t a surprise: the agency’s rivals already pulled that trigger back in 2011 (S&P) and 2023 (Fitch) after bouts of debt brinkmanship in Congress, and Moody’s itself already warned back in 2023 it’d be next.
But why now? Sure, Friday is a good time to announce something that might get you in trouble, and the White House alleges it’s all political, but as for the month of May in 2025?
Moody’s might’ve been watching both a) DOGE’s progress in cutting spending, and b) Congress’s efforts to cut revenues (taxes). And both are flashing red:
- DOGE has only itemised ~$71B in (disputed) cuts, around 97% less than the $2T Musk was initially promising, while
- Tariff revenues seem unlikely to make a meaningful dent, and yet the White House is doubling down on the president’s tax cuts that’ll curb revenue further.
So seeing little prospect of reversing a fiscal trend that’s been worsening since the 1990s, Moody’s made its move.
But does it matter?
To paraphrase the last president to post a surplus, the definition of “matter” matters here.
First, back when S&P first cut America’s rating in 2011, markets panicked, then quickly forgot. This time around, there’ve been tremors in stocks and bonds, but there’s also an assumption we’ll soon skip to the forgetting part — whether this Moody’s move was inevitable, late, or irrelevant (or all three), it was already baked in.
Second, major players mostly lump AAA and AA1 together as risk-free (there are 21 notches on the scale), so this is unlikely to impact, say, how major funds weigh their risk.
And third, if the superpower with a machine printing the world’s favourite currency isn’t a AAA borrower, then who is? There are now barely a dozen countries on that (shrinking) list, including Australia, Germany, Norway, Singapore, and Switzerland. And even if you want to conclude that these governments are more creditworthy than the US, there just aren’t that many of them — so investors wanting safe havens don’t have a lot of options.
But still, none of this is to suggest this ratings update is meaningless. Rather, it’s more a reminder that, even as a superpower with the world’s reserve currency, there’s a limit to how much profligacy and dysfunction markets will tolerate.
Intrigue’s Take
This whole issue has long been one of those ✌️over-the-horizon✌️ things: sure, at some stage we’ve gotta get US finances back on a more sustainable track, but the economy is fine. And you could view these stories as steps towards that ‘some stage’. The trouble is, nobody really knows when the ‘then’ might become ‘now’, and by the time we hit ‘now’ it could be too late: bond markets freak out, US interest costs surge higher, and so on.
So how tricky is the fiscal problem? Around three quarters of US spending is already mandatory — 60% on programs like social security, Medicare, and Medicaid, with another 13% covering interest on existing debt (most of which is held within the US itself). The final 27% covers defence (12%) plus education and infrastructure (13%). All core stuff.
Meanwhile on the revenue side, even closing the ‘buy, borrow, die‘ loophole, that enables squillionaires to pay effective tax rates below 3%, involves political and technical hurdles.
So that might explain why Trump’s treasury secretary (Bessent) focuses less on choices, and more on promising pro-growth policies, all in hopes the US might grow its way out.
Sound even smarter:
- The Moody’s note also emphasises “the size, resilience and dynamism of [the US] economy and the role of the US dollar as global reserve currency” all mean the US still has “exceptional credit strengths“.
- Moments ago, China’s foreign ministry responded to the Moody’s move by urging the US to “act responsibly”.
