USA loses its Aaa rating: Moody's downgrades due to debt!

USA loses its Aaa rating: Moody's downgrades due to debt!

Moody's has downgraded the US's credit rating from Aaa to Aa1, making it the last of the major rating agencies to strip the US government of this top rating. The main reason for the downgrade is the continuously increasing national debt. This could significantly increase the cost for the US to raise money through government bonds, which could have negative economic consequences such as South Germans reported.

Fitch and S&P previously cut their ratings from AAA to AA+, increasing concerns about the financial situation of the United States. Fitch made this downgrade in 2023, while S&P cut the rating back in 2011. Moody's highlights that national debt and the costs of servicing it have risen dramatically over the past decade. In an international comparison, the debt ratio of the USA is significantly higher than other countries with top ratings.

Economic framework conditions and deficits

Although the rating agency recognizes the economic and financial strength of the USA, it sees a clear regression in public finances. Their outlook remains stable, despite the high deficits, which amount to almost two trillion dollars in the annual US government budget, which corresponds to more than six percent of gross domestic product. Moody's predicts that without necessary course corrections, debt could reach almost nine percent of economic output by 2035.

US government bonds continue to be considered one of the few “safe havens” for investors. However, concerns are rising following President Trump's announcements that Treasury yields could also skyrocket. Trump had repeatedly emphasized that the deficit had to be reduced and had appointed Elon Musk to cut costs. However, the savings under Musk's direction did not meet expectations.

The reactions of market participants

Analysts at Independent Credit View (I-CV) had already predicted a downgrade in advance. Moody’s also gave a negative outlook in November 2023. The recent “Trump crash” has triggered further turbulence in the US Treasury bond market. Investors with triple-A requirements could be forced to restructure their portfolios, leading to possible market turmoil.

In the current situation, alternatives to US government bonds could become increasingly important for investors. Triple-A countries such as Germany, Switzerland, Sweden, the Netherlands or Australia could also come into greater focus. Moody's has a total of 21 rating levels, and the current downgrade shows clear signs of a long-standing debt economy that is considered worrisome.