Recently, Moody’s downgraded the United States’ credit rating due to concerns about its massive $36 trillion debt. This move caused disruptions in financial markets and may complicate President Donald Trump’s tax reduction efforts.
Moody’s lowered the US government’s credit score from Aaa to Aa1, citing increasing debt and high interest costs compared to other similarly rated countries.
Last week’s downgrade by Moody’s followed a similar action by Fitch in 2023 and Standard & Poor’s in 2011, stripping the US of its AAA rating.
Investors use credit ratings to evaluate the risk of companies and governments, with lower ratings leading to higher borrowing costs.
What reasons did Moody’s give for the downgrade?
Moody’s mentioned that the US has failed to address the trend of growing fiscal deficits and increasing interest costs. Over the years, federal debt has risen due to continuous deficits and rising spending combined with tax cuts.
This is the first time Moody’s has downgraded Washington’s credit score since 1949 when it started rating US government debt.
Since taking office, Trump has aimed to balance the budget, but Washington’s debt continues to grow at a rate of $1 trillion every three months.
Efforts to cut spending through the Department of Government Efficiency have not been as successful as hoped, and attempts to raise revenue through tariffs may not be effective, according to most economists.
US government bonds have long been considered a safe investment, but doubts are arising about their status as a global benchmark.
How serious is the US debt problem?
Data from the US Department of the Treasury shows that a significant portion of tax revenues is used to cover debt interest payments, far higher than in other countries like Germany.
Moody’s predicts that the US federal deficit will continue to widen, leading to a debt burden of 134 percent of GDP by 2035.
Despite these challenges, Moody’s acknowledges the US’s strengths such as its size, resilience, and the role of the US dollar as the global reserve currency.
How has the Trump administration responded?
The White House has criticized Moody’s downgrade as politically motivated, with some officials suggesting bias against the administration.
What’s the backdrop?
Trump is advocating for the extension of tax cuts introduced in 2017, but the recent downgrade has caused obstacles in passing legislation related to this issue.
Moody’s downgrade raised concerns about the US sovereign debt, affecting bond yields and other financial markets.
Why does it matter?
Lower credit ratings typically lead to higher bond yields, impacting interest rates on various loans for consumers. This is particularly important for Americans who carry high levels of debt relative to GDP.
Swiss, Australia, dan Kanada memiliki rasio hutang rumah tangga terhadap GDP lebih dari 100 persen.
Jika pemerintah AS terus menghabiskan lebih banyak untuk pembayaran hutang yang meningkat, maka akan memiliki lebih sedikit untuk pengeluaran publik seperti Jaminan Sosial, kesehatan, dan pertahanan karena menjadi lebih mahal bagi pemerintah untuk bertahan.
Washington bisa menaikkan pajak untuk menghasilkan lebih banyak pendapatan untuk melunasi utangnya. Tapi Trump nampaknya akan menuju ke arah yang berlawanan – menurunkan baik pajak maupun pengeluaran publik.
Peringatan kredit kedaulatan, termasuk yang terjadi minggu lalu, merusak kepercayaan investor. Kehilangan status AAA dari ketiga lembaga pemeringkat utama adalah pukulan simbolis bagi prestise Amerika.