Unlock the White House Watch watch newsletter for free
Your guide on what Trump’s second term for Washington, Business and the World means
The writer is president of Structured Credit International Corp and former main vice-president of S&P during The Latin American debt crisis
Donald Trump has just won a dubious distinction: for the first time in more than a century, the United States has not had any AAA credit note from a large agency. Moody’s Downrade of the Us to AA1 last week stripped the country of his latest triple A.
After the historic demotion of S&P Global Ratings in 2011 and the similar Fitch Cup in 2023, Moody’s decision gave an unwanted verdict on American finances – and she landed downright at the door of President Trump.
Each of the “three large” of the reports of the notes stems from the same fundamental problem: chronic poor budget management motivated by political paralysis. The demotion of the S&P in 2011 came after a bitter fight of the debt ceiling and a plan to reduce the deficit which he considered inadequate, in the midst of an intense political polarization and a lack of credible solution.
The action of Fitch in 2023 warned against a regular deterioration of American governance and the duration of the perennial debt. Moody’s now adds its alarm that, despite a decade of increasing debt and persistent deficits, Washington has limited budgetary flexibility. Law expenses are to climb, offbeat tax revenue and none of the parties is willing to make compromises. The message of agencies is clear: the partisan impasse and the uncertainty of America policies have serious financial consequences.
The past downsides did not succeed in frightening investors – in 2011, treasury bills paradoxically rallied after the S&P Cup, and the Fitch move in 2023 had little impact on American bond yields.
This time, we have seen a leap in yields on the 30-year-old American treasury bills at more than 5%, eclipstating a recent rush during the giations that followed the questionable announcement of Trump’s “Liberation Day” of price increases.
As long as the US government continues to honor its obligations, the Treasury debt will retain its status almost as a “risk -free” reference. The three agencies are currently attributing a stable perspective in the United States, noted any immediate demotion. But Moody’s warned that if debt measures or governance deteriorate more, another reduction in rating is possible. In short, the White House is about to prevent a clear drop in solvency.
Politically, Moody’s verdict intensified the game of blame in Washington. Democrats claim that this justifies their warnings about Trump’s tax policies – the Senate Democrat chief Chuck Schumer described this as “awakening” to prevent the “tax gifts” of the Republicans. Republicans retort that excessive expenses – and not tax reductions – are the real culprit, and some reject demotion as an exaggerated reaction by rating agencies.
It is a replay of past tests. After the 2011 S&P Cup, each political team pointed out. The Obama administration also continued S&P in 2013 for its mistakes during the financial crisis, which led to a payment of $ 1.5 billion by the Credit Agency to settle the proceedings. And after the demotion of Fitch in 2023, Biden officials declined this decision as “arbitrary”.
The uncomfortable truth is that the two parties contributed to the emerging American debt, but none supports a lasting solution. “During more than a decade, the American federal debt increased sharply due to continuous budgetary deficits,” said Moody’s in his reporting of rating “during this period, federal expenses increased while tax reductions have reduced government income. As deficits and debt increased, and interest rates increased, payments of interest on government debt have increased markedly. “
Structural dysfunction – rooted polarization and perpetual edge – makes budgetary reform seriously impossible. Dysfunction persists. Without a large bipartite affair on expenses and income, the budgetary trajectory of the nation is aggravated, whatever who occupies the oval office.
A great reason why the loan that we must be unpunished is the unparalleled role of the dollar as a global reserve currency. But the share of international reserves held in dollars increased from almost 80% in the 1970s to less than 60%. Moody’s acknowledges that the domination of the dollar as a reserve actor gives us extraordinary financial flexibility.
Even after the previous demances, global investors have continued to buy American debts, seeking its security, stressing that there is still no significant alternative to the depth and liquidity of the American treasures. But this cushion is not infallible or forever. Each ceiling of the debt frightens and each credit warning the distance from the management of the United States.
Losing AAA status at all levels is a symbolic blow for American prestige. He should encourage Washington to obtain his tax house in order before the faith in the dollar – and the country’s financial exceptionalism – seriously crumbling.
