What does a lower credit assessment for the US mean?

The leading credit rating agency Moody’s has reduced the creditworthiness status of the United States. Instead of the highest Triple A-assessment, the score is now a step lower: AA1. In total, the scale of Moody’s has 21 levels. With this step, the US does not have the highest status in any of the large credit rating agencies.

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What is a creditworthiness status anyway?

It is a score that is used to determine how high the risk of a certain loan is. Credit reviews exist for companies that want to borrow money and for government loans. Investors run more risk with borrowers with a low score and will generally want to see a higher interest rate for that, which means that the costs of borrowing money are higher.

Countries that still have the highest credit score include the Netherlands, Australia, Germany, Singapore and Switzerland. The AA1 valuation applies to, among others, Austria and Finland, the United Kingdom is two more steps lower on AA3.

There is also criticism of credit rating agents themselves. For the credit crisis erupted in 2008, the assessment agencies gave their highest appreciation to investment products in American rommel mortgages. That status turned out to be worth little when the value of those investments went to zero. The assessors issued their stamps on behalf of the providers of those products and were paid more for a higher appreciation, which was a perverse incentive. That does not play a role in the assessment of countries: they do not pay for a rating themselves.

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Why does Moody’s do this?

The credit rating agent has great questions about the ever -growing US national debt. It is currently more than 36 trillion dollars (36 with twelve zeros behind it).

The federal government has started to spend more and more money in recent years, while the income due to tax cuts have become smaller. This creates a budget deficit. Last year that was already 6.4 percent of the gross domestic product (GDP), Moody’s expected that this will have risen to almost 9 percent in 2035.

To fill that gap, the government must borrow. And that is becoming increasingly expensive for the US. In 2021, the American federal government still spent around 9 percent of its income on interest payments, last year that had already risen to 18 percent. If nothing changes, Moody’s expect that in 2035 no less than 30 percent of all federal income will go to interest payments. That is a huge amount: the US has cost the US more since last year than expenditure on the Ministry of Defense or Care.

According to Moody’s, other countries with an AAA status have lost around 1.6 percent of their income to interest payments. This means that the assessor does not think that the US belongs in the same group. « Although we acknowledge the economic and financial power of the US, we believe that they no longer outweigh the deterioration of the budget figures, » writes Moody’s in a statement.

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What was the drop now?

In his statement, Moody’s outlines a context of years of expenditure increases, but it also specifically mentions the tax reductions that Donald Trump made in his previous president period. « If they are extended, what our starting point is, then that will add 4 trillion dollars to the national debt in the coming ten years. »

Exactly that extension tried to guide the Republican party last Friday through the House of Representatives. That did not work for the time being, because there is also fear among part of the Republicans that the national debt will then become too great.

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What are the consequences of a lower assessment now?

The reduction was only announced on Friday just before the closing of the financial markets. A real reaction is yet to come, but in the last trading minutes on Friday the interest on ten -year government loans already rose by 0.05 percentage point to almost 4.5 percent. A counter -noise also sounds: AA1 is still a very high score.

Rising interest rates on government loans have major consequences. It makes the plans of politicians too expensive and therefore impracticable. It is not the first time under Trumps second term that the interest on American bonds rises. This happened at the beginning of April even after the President announced high import duties on goods from other countries. Then the ten -year interest rate rose in less than a week from 3.9 to 4.5 percent, and Trump pressed the pause button for his import duties.

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Is it unexpected?

Not really. With a credit score there is also a package leaflet that indicates whether the valuation will stand. Already in November 2023 it became so -called ‘outlook‘With Moody’s negative. Now that the assessment has actually been reduced, the preview has been restored to ‘stable’.

Moody’s is also not the first to give the US a worse score. Of the three large credit rating agencies, it is even the last one. Competitor Fitch took that step in 2023, Standard & Poor’s already lowered the score in 2011. They also pointed to the high US national debt and the political struggle that is being fed every time to increase the debt ceiling.

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