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Moody’s added to the growing list of U.S. debt warnings and appeared to inch closer to a downgrade in a recent report that sounded the alarm on the deteriorating fiscal situation. The ratings agency said that America’s AAA grade increasingly relies on “the unique and central roles of the dollar and Treasury bond market in global finance,” but that soaring debt and deficits are offsetting those advantages.
America has long enjoyed the “exorbitant privilege” of the dollar’s status as the global reserve currency, but worsening debt and deficits could soon outweigh that immense advantage.
On Tuesday, Moody’s added to the growing list of U.S. debt warnings in a report that sounded the alarm on the deteriorating fiscal situation.
The ratings agency said America’s triple-A grade increasingly relies on “extraordinary economic strength and the unique and central roles of the dollar and Treasury bond market in global finance.”
Moody’s noted higher interest rates have made debt less affordable. That’s partly a result of rate hikes from the Federal Reserve to rein in inflation as well as massive deficits under President Joe Biden.
But it also said President Donald Trump’s policies could worsen the situation and neutralize America’s financial advantages.
“The potential negative credit impact of sustained high tariffs, unfunded tax cuts, and significant tail risks to the economy have diminished prospects that these formidable strengths will continue to offset widening fiscal deficits and declining debt affordability,” the report said.
In fact, the Congressional Budget Office said last Friday that if tax cuts from Trump’s first term are extended permanently, debt held by the public would reach 214% of GDP in 2054.
And if borrowing costs face more upward pressure amid deteriorating fiscal conditions, amounting to an additional one percentage point, debt would hit 204% of GDP in 2047 and exceed 250% in 2054.
Moody’s is the last of the major rating agencies that still gives U.S. debt a top mark. Fitch cut the U.S. by one notch in 2023, citing fiscal deterioration and repeated debt-ceiling brinkmanship. That followed a similar downgrade from Standard & Poor’s in 2011 after an earlier debt-ceiling crisis.
In November 2023, Moody’s lowered its outlook on U.S. debt to negative, which is often a precursor to an eventual downgrade of the credit rating.
The latest report showed no sign of improvement. By 2035, Moody’s estimated the U.S. will spend 30% of its revenue on paying interest on its debt, up from 9% in 2021 when borrowing costs were still low. Meanwhile, debt will rise to around 130% of GDP by 2035 from nearly 100% in 2025.
