Moody’s Downgrades U.S. Debt

Warning that the fiscal strength of the United States has “materially decreased,” Moody’s has downgraded its rating of U.S. government debt, stripping Washington of its triple-A credit rating and lowering the U.S. to its second-tier rating of “Aa1”.

Moody’s said its decision “reflects the increase over more than a decade in government debt and interest payment ratios” and its expectation that U.S. fiscal performance is likely to deteriorate.

“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” said Moody’s, predicting that Washington’s plans to extend the 2017 tax cuts will add about $4 trillion to the federal deficit over the next decade.

Moody’s sees the total U.S. debt climbing to 134 percent of gross domestic product in 10 years, up from 98 percent in 2024. Annual federal deficits  will rise to nearly 9 percent of GDP during the same time span, predicts the credit agency, up from about 6-1/2 percent in 2024.

Interest on the debt is consuming a growing share of federal revenue. Currently 18 percent of revenue, Moody’s forecasts interest payments will rise to about 30 percent of revenue by 2035.

While Moody’s now has a “stable” outlook on the U.S., it warns that if interest rates shoot significantly higher—possibly as a result of global investors pulling out of dollar assets—the increased cost of interest payments on the debt could lead to a faster deterioration in fiscal strength that could precipitate another downgrade.

In lowering its rating, Moody’s joins Standard and Poor’s, which downgraded the U.S. in 2011, and Fitch, which cut its rating of the U.S. in 2023.