US government kisses its last triple-A credit rating goodbye. Downgrade to “junk” would have been more appropriate?
By Wolf Richter for WOLF STREET.
The US government lost its last remaining triple-A credit rating late Friday, as Moody’s finally, after more than a decade of dithering, downgraded the government to Aa1, one notch below the top credit rating of Aaa.
The downgrade “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” Moody’s said in the announcement.
And it added:
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
And it warned:
“Persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”
It expects the federal deficits to reach “nearly 9% of GDP by 2035, up from 6.4% in 2024.”
Moody’s was the last of the three major US credit ratings agencies to cut the US government credit rating, years behind:
- In 2011, S&P Global Ratings downgraded the US one notch to AA+
- In 2023, Fitch Ratings downgraded the US one notch to AA+.
While reading Moody’s “ratings rationale,” one gets the impression that the US government should have been cut to a “junk” credit rating, maybe to a mid-level junk rating such as Ba3, to allow for some wriggle room either way (here is my cheat sheet for bond credit ratings by ratings agency
Not that these downgrades make a lot – or any – difference. For example. Moody’s rates Japan A1, that’s four notches below triple-A and three notches below the new and improved US credit rating, and so what. Nothing happened.
The problem arises when inflation comes along and the bond market gets spooked, and if the central bank tries to bail out the borrower, such as the Fed trying to bail out the US government, with bond purchases (QE) and interest-rate repression, while inflation is taking off, it could cause inflation to go completely out of control and spiral into the triple digits, such as it has done in Argentina and many other countries, by which time the own currency becomes kind of useless. Everyone knows this. So this is likely not going to be experimented with in the US.
Upon the news, the 10-year Treasury yield spiked in late trading all the way to high heaven, by something like, wait for it, 4 basis points, to a whopping 4.48%, about halfway back where it had been … yesterday.
It’s not until the bond market scares the bejesus out of Congress and the Administration that they will do anything serious about reducing the deficits.
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Thanks for this report WR.
These ratings for US Govt debts has no bearing as US Govt owns the printing press and can never default. Please correct me if I am wrong..
Correct, it can never default on the debt. But as I said in my third-to-last paragraph:
“The problem arises when inflation comes along and the bond market gets spooked, and if the central bank tries to bail out the borrower, such as the Fed trying to bail out the US government, with bond purchases (QE) and interest-rate repression, while inflation is taking off, it could cause inflation to go completely out of control and spiral into the triple digits, such as it has done in Argentina and many other countries, by which time the own currency becomes kind of useless. Everyone knows this. So this is likely not going to be experimented with in the US.“
Well, then what tools will remain at that point? Managing this is like planting a tree — the best time for that is 10 years ago. The next best time is now. Based on the current budget proposal, “now” is not on the table.
The only real tool is the bond market. That’s what it’s for. If it finally gets really pissed off and demands much higher yields to buy the debt, while inflation is surging, and the Fed’s hands are tied to avoid descending into much worse inflation, that will scare the bejesus out of Congress, maybe for long enough to do something about the deficit.
They shouldn’t even be thinking about thinking about additional tax cuts at this stage.
The problem isn’t insurmountable. They don’t even need to balance the budget. All they need to do is get the deficit to 2% of GDP, and that will whittle down the burden of the debt over the years via modest inflation and economic growth. But you can’t be talking about tax cuts to get there. That’s just insane.
Typo : “time the own currency”
Maybe “the” should be “their” ? As in “time their own currency.” ?
The stock market responded to the down grade by going up, and oddly, gold went down. But then the Wall Street Casino follows it’s own peculiar logic.
I expect that the Federal Reserve will look to protect the cartel of private banks that own it. And that Congress will pass a broad general tax and austere cuts onto the ordinary public, while handing out generous tax cuts to the Super Duper Rich.
Interesting times.
wolf, if i’m doing my math correctly, 2% of gdp for the u.s. would be less than $600 billion. that would be about a 75% decrease in the current deficit. not doing tax cuts wouldn’t be enough to achieve that. they’d need a combination of $1.6 trillion in tax *increases* and spending cuts.
By this logic Zimbabwe can’t default, because it owns a press.
Problem: it costs money to print money. Paper and ink have to be purchased with money and the suppliers reach a point where they don’t want yr product. This accounts for the huge denomination notes issued near the end. Before the euro, Italy had a 500 K lira note. But all real estate and even cars were priced in US$.
You can’t default on internal debt as long as the govt has will and POWER to
enforce its writ re currency. This evaporates slowly, then quickly.
In all Moscow restaurants the prices are in US$, but you can’t pay in US $.
You can only pay in roubles, which must be exchanged at an artificial rate.
Unless you are offered a private street deal to ‘exchange money’
Not recommended. It’s hostage season.
I’ll just add here: Zimbabwe never defaulted on debt issued in its own currency. But it defaulted on foreign-currency debt. If a country destroys its own currency (as you point out), then it can no longer borrow in its own currency because no one wants to buy that debt or hold that debt, or they demand gigantic yields, and so the country borrows in foreign currency, and then defaults on the foreign currency that it cannot print. That’s what Zimbabwe did.
Argentina has defaulted on its foreign-currency debt something like 8 times or whatever. It’s got that system down pat. They work with Wall Street to issue these dollar bonds, euro bonds, and yen bonds and rip off investors in developing-market bond-funds. They’re all gangsters. No one should ever lend any money to Argentina.
I read yesterday that the RC bill the House is looking at will create a $5T deficit over the next two years. $2T this year and then $3T for FY 2026. I guess DOGE was meaningless or at least it didn’t get Congresses attention enough to enact meaningful cuts. Maybe it’s a good thing that the Big Beautiful Bill doesn’t pass.
Yikes!
Even if it doesn’t pass, what we will get sure as hell won’t make a dent in deficit reduction. Maybe it will make a promise to reduce the deficit in future years, like EVERY budget has for the last 10+ years.
Well, maybe the issue isn’t with the expense side but more with the income side. Like, if you want people to enjoy the benefits of a stable prosperous economy, claw back some of the profits the monopolists and robber barons are accumulating.
Geez, naw, just kidding! Like our prez.
Tax the rich. And I mean the oligarchs.
You could not be more incorrect. Spending has exploded 40% since 2019. 40%!!! Have you increased your spending by this amount since 2019? Have you seen a 40% improvement in government services since 2019? This has to change or our kids will have a permanently lower standard of living.
Both parties are obviously at fault here, but the problem is VERY clearly spending and not revenue.
Well, only Congress can actually cut spending. DOGE could theoretically find some waste, but when it stops congressionally approved spending, that’s actually illegal, and technically a default on US debt, as was pointed out in the wsj op ed penned by the 5 former Treasurers. DOGE was simply a distraction for the real budget changes, which were actually massive increases in deficit spending. But there was a guy with a chainsaw or something so blah, blah, blah, must be reducing spending. Nope.
For decades, we’ve had the best Congress that money can buy. They will continue to buy votes with these schemes until the bond market scares the bejesus out of them. Nothing will change until then.
So if uber high / spiking bond prices scares the BeJesus out of Congress. What happens to the rest of us? Sudden Cardiac Arrest? Also, is it safe to say our debt crisis isn’t, as the saying goes, 30 years down the road like nuclear fusion?
I’m not sure a majority in Congress are intelligent enough to be scared.
as long as foreigners are tripping over themselves to buy u.s. debt at 4.5%, the status quo can continue.
Right on Wolf.
The Bond Vigilantes need to come out of hiding. Are they hiding in Argentina?
At some point the Hemingway quote will become reality. “How did you become bankrupt? Gradually, then suddenly”
DOGE is not about efficiency. It’s about shutting down what the administration and tech bros don’t like.
Huh?! DOGE is run by a tech bro, installed and endorsed by the current administration.
(Well, I hear Elon is stepping out of his role, but still)
the problem is really that only 10-15% of federal spending is actually discretionary. so unless you’re willing to cut social security or medicare benefits which have already been earned, to make reductions to medicaid, cut the defense budget, or default on interest payments on the debt, you won’t make any meaningful reductions.
It looks to me like the stock market is back to kicking butt. Who’s worried? AS IF the president and congress ever want any type of deficit reduction. Re-election is more important.
Drunken Congress(es); drunken Administration(s); drunken sailors(voters). And we’re all seeing pink elephants.
According to the Wharton Model a VAT tax might be a solution. Problem is, if you give Washington a way out they will take it and keep on spending us into oblivion.
Trump believes in Bitcoin. Is this going to be our new currency? Perhaps a gold backed dollar would be a better choice.
Trump doesn’t believe in Bitcoin (and surely doesn’t understand much about it). He believes his family can make piles of money via crypto. Big difference.
More noise. It’s a joke, sadly. We need genuine, meaningful change. The politicians need to stop talking the talk and start walking the walk. They need to raise taxes on the super rich, as well as the ridiculously overvalued corporations that charge consumers too much for their goods and services and make more money than they know what to do with so their stock prices stay up in bubble land. Corporate insiders print their own winning mega-millions lottery tickets whenever they want. The working men and women get tossed a few breadcrumbs.
Here here!
I agree, sorta. But bro, you did actually see the last two guys that were president, no?
I mean, come on. That’s such a clown show up there.
…. In this corner, a blathering moron from the Georgia hills, squaring off against a guy who pulls fire alarms like he’s in middle school.
You can tax the “rich” all you want, and it will not be enough to satisfy the expanding welfare state and other pork that Congress is cooking. We have a massive, massive spending problem. It must be reined in. And people who are truly wealthy will simply not pay confiscatory rates, nor should they.
Every state with a massive welfare system taxes the absolute crap out of the middle class with VAT and confiscatory income taxes because middle class people have easily measured and verifiable income that cannot be massaged, whereas the very wealthy have the ability to take income in many forms and locations.
Remember, our original income tax applied to today’s equivalent of roughly the top 0.3%. Look how that has turned out, massive payroll taxes for the working class.
There is basically 0 political incentive for any administration to balance the budget. It will either cause a lot of pain in the form of much higher taxes or deep deep deep cuts to everything.
But while this will affect the market somewhat. The stock market didn’t seem to care that much in the futures.
The stock market is very overvalued, it will go down again at some point.
Wolf, Question for you …… , in the Current Quantitative Tightening by the Federal Reserve…., are they only letting these Securities Run Off and not Selling them ?
They’re not selling any securities right now. But they once again started talking about selling MBS. They talked about it a couple of years ago, but then in early 2023, three banks imploded that held MBS, and they stopped talking about it. Now they’re talking about it again — I’ve already heard it in two speeches. We should see a mention in the minutes if they’re serious about doing this, and I will of course instantly make a big deal out of it.
Selling MBS. Damn, I’d like to see that.
Just wondering, what has got the Fed talking about selling MBS again?
They’d like to decrease or even reverse treasury runoff while still running QT overall. That means they have to let go of their non-treasury assets at a faster rate.
They really don’t like them on their balance sheet and want to get rid of them. And pass-through principal payments are now just a trickle and will likely stay that way. So the MBS will stick on the balance sheet way too long.
Nobody really cares about the ratings of credit agencies. The US dollar is backed by the full faith and credit of our nuclear arsenal and the largest economic power on the planet.
I think that this isn’t true. It’s almost arrogant to think you’re so powerful that people won’t invest in you. A lot of pension funds have guidelines that prevent them from holding bonds for companies or countries that do not have specific credit ratings. I think the instant spike in the bond rates right after this was announced suggest that the bond ratings are important
Did you miss this from Wolf in his blog? Did you miss the collapse in 2011 and 2023?
Moody’s was the last of the three major US credit ratings agencies to cut the US government credit rating, years behind:
In 2011, S&P Global Ratings downgraded the US one notch to AA+
In 2023, Fitch Ratings downgraded the US one notch to AA+.
Canadaguy, the spike in the 10 year Treasury was unimportant. RTGDFA, especially the next to the last paragraph. Note that Mr. Richter is being sarcastic.
8 trillion of our debt on the pointless ‘war on terror.” Nukes don’t really matter when everyone has them. The world, or more specifically is in danger of MAED(mutually assured economic destruction). When you spend on your military more than next 10 highest combined and can’t defeat the Taliban you aren’t exactly winning.
Military spending serves two purposes: one is a jobs program for young men with no other prospects, the other is a re-election plan for congress critters in strategically chosen locations. Actual effectiveness and need is irrelevant.
Given how they handled the wars on alcohol and later drugs, terrorism will soon be legal such that you can buy bombs and drones on any street corner…so long as the clown school administration gets their tax payment. On sale here—>Beer & Ammo! Driver Licenses—>The Short Form Available.
“Nobody really cares about the ratings of credit agencies.”
Maybe some folks remember how the ratings agencies lied their collective asses off when they called toxic MBS Triple AAA Platinum Plus when they knew they were poison.
…and no one went to jail. So why care what they say now?
The US has nothing to worry about until another viable virtually risk free investment exists. The time to get our fiscal house in order was decades ago but the combination of demographics (aging population, declining birth rates) and significant tax cuts it only gets worse from here. Obviously with the wealth we have here plenty of solid solutions exist but that would presume our elected representatives actually represent. It isn’t like we don’t have other countries to look at to see where this all goes.
You talked about everything contributing to the deficit except the one factor that is THE most important.
Federal spending is exploding. If we cut spending to 2019 levels, we would have a massive surplus. If we required ACA Medicaid expansion to have states pay 50%, like the rest of Medicaid, we would eliminate a third of the ongoing deficit, and treat the very poor the same as those above the poverty line, which is the moral thing to do.
The US has everything to worry about. Dropping these huge deficits will cause major economic pain; deep recession or worse. Not to mention the social ramifications.
On the otherhand letting it continue will likley result in a worse reset/situation. ‘
The muliplier effect of 2T deficit is likley 5-6T of actual spending power in the economy, likely more.
Meanwhile, the rest of the world is growing impatient with our abuse of their dollar.
Economically, the U.S. is in better shape than the rest of the world. It is the one place where capitalism always gets a smile and a nod. Despite the advances of the left, they never yank out the carpet from underneath the business class — only circumscribe it somewhat.
The Laffer Curve, supply-side economics, has already been denigrated. The deficits must be cut. Only interest is “untouchable”.
Won’t make a lick of difference to our elected officials, reguardless of which side of the aisle they sit.
To actually balance the budget you’d have to cut from everything and tax from everyone. Raising taxes on the “rich” won’t do jack shit. Cutting a 40 million contract won’t do shit.
SS needs serious reform as does the proxy war and national building department (“defense”) but good luck getting the losers in Washington to do any of that
I didn’t mean that as a reply to you lol
Apparently: “Several countries hold a triple-A (AAA) credit rating, indicating the highest level of creditworthiness. As of 2024, these include Australia, Canada, Denmark, Germany, Luxembourg, Netherlands, Switzerland, Norway, Singapore, and Sweden.”
Just sayin’.
Good to drop the rating on a Friday so it mostly
goes unnoticed by Joe Sixpack.
10yr Bond Yields –
4.484% USA
4.511% Australia
3.197% Canada
2.486% Denmark
2.586% Germany
2.803% Netherlands
0.298% Switzerland
4.071% Norway
2.512% Singapore
2.341% Sweden
The point being that countries many Americans may regard as being socialist or at least left-leaning are considered to be a better risk than the USA, because of their good economic management.
You’re telling half of the story. They have lower 10 year bond yields partly because they are viewed as a better credit risk.
But those countries also all have short term rates far below US rates because their central banks view the possibility of lower long term growth relative to the US, and the market agrees.
So much of what you are pointing out is a result of interest rate suppression in those countries by their central banks. Hardly a vote of confidence in the economy or government management of those countries. If they had red hot economic performance, they would have rates more like those in the US.
I’d agree, good summary.
Since the horse has left the barn debt wise here in USA, I wonder how it all plays out. I suppose Wolf’s inflation scenario.
Income taxes aren’t painful in America imho… yet. Prop taxes, health insurance, retirement, college costs, etc tough
and ever increasing. But we get off pretty easy for now tax wise. I’m not sure your average citizen is ready to pony up
after years of declining real rates.
Maybe they can whack away at Medicare et al. We do pay 2-3x more than the other countries listed.
Then you have SSI. Handing older (many helpless) folks 80 cents on the dollar of benefits hard to stomach. Maybe lift cap on SSI taxes , etc
Then you have defense for $1T. And net interest for $1T. That’s the vast majority of the budget.
Quite the riddle. Crazy as there are many logical levers to pull and feels like we are riding off a cliff.
If tariffs hang around long enough to fix the trade deficit, we’ll find out if the federal deficit is linked somehow!
One possibility is that if the trade deficit is fixed it should cause import substitution in the process. The additional production of import substitutes, will cause a change in employment will in turn pressure inflation higher. That in turn causing the Federal Reserve to empower the bond market to cause the voters and Congress to be in an anti-inflation, deficit fighting mood.
The economy seems to be a Rube-Goldberg machine by default! Everything is linked to everything and back around again in a myriad of ways!
If the U.S. government really wants to get serious about dealing with the deficit, then they should stop blaming it all on entitlement spending and begin focusing on something other than repeating rounds of deep cuts to tax revenues.
But I suppose such a narrative would not sit very well with their affluent handlers and campaign sponsors. So instead of solving the problem, let’s just continue to blame immigrants and poor people.
Wolf, I have read that the downgrade by Moody’s to AA ( the last of the major ratings agencies that rated the U.S. Government at AAA) means there will be forced selling by some investors that are required to only hold AAA rated securities.
Have you researched that at all Wolf?
If true, this appears to be a market impacting news item that doesn’t seem to be getting much notice.
That requirement may apply particularly to foreign investors.
Still, given the enormous financing requirements of the U.S., this could put more upward pressure on longer term yields and the ongoing “bearish steepener”