Moody's Downgrades America's Credit Rating
There are three main credit agencies that assess the creditworthiness of government debt. Often called the “Big Three,” they are Moody’s, Standard & Poor’s and Fitch. The ratings they assign give investors insight into the level of risk associated with investing in a particular country’s debt.
Here in the U.S., the Treasury Department sells debt securities to both domestic and foreign investors, which include individuals, corporations and even foreign governments. These debt securities are typically in the form of U.S. Treasury bills, notes and bonds and vary in their length of maturity and the interest payments investors receive.
When the U.S. government needs to borrow money – which it does a lot of – the Treasury sells additional debt securities. In return, investors receive regular interest payments. The interest rate investors receive is due, in part, by our nation’s credit rating and its perceived ability to repay its debt. The U.S. government guarantees that all interest and principal payments will be made on time. To date, the U.S. government has never defaulted on its debt obligations.
Despite its stellar record, on Friday, May 18, Moody’s downgraded our nation’s credit rating from its highest AAA rating to its second-highest rating of Aa1. This is not the first time America’s credit rating has been lowered. Standard & Poor’s issued a similar downgrade in April 2011 while Fitch lowered its rating in August 2023. So, what triggered Moody’s to suddenly issue its downgrade just a few weeks ago?
In its decision, Moody’s cites a very high amount of debt America has borrowed and the high cost of carrying that debt. For its fiscal year-end 2024, America’s total government debt reached a staggering $36.2 trillion, a record high. That’s up 56% over the past five years and 103% higher than 10 years ago.
All this debt requires interest payments to be made to the investors who purchased the debt. In fiscal year 2024, the U.S. government paid a massive $882 billion in interest payments to investors. For 2025, the Congressional Budget Office projects that interest payments on America’s debt will rise to $952 billion, just shy of a trillion dollars.
As we can all relate to, paying off debt requires money. But that brings up yet another challenge for the U.S. government. The U.S. has a long history of spending more money than it brings in.
In 2024, America’s fiscal deficit was $1.83 trillion, up from 2023’s deficit of $1.7 trillion. The government brought in $4.92 trillion in revenues but spent $6.75 trillion on expenses. The last time our country reported a surplus was 2001, when revenues outpaced expenses by a mere $130 billion.
To improve our nation’s finances requires the government to increase revenues and/or to reduce its expenses. Both options, however, are politically sensitive. Increasing revenues generally means raising taxes and fees on individuals and businesses. But Americans are still feeling the pain from the worst bout of inflation in nearly half a century. Good luck to any politician that argues taxes and fees should now be raised even higher.
But there’s also not a lot of wiggle room to cut government spending. In 2024, 60% ($41 trillion) of all government spending went to mandatory payments for Social Security, Medicare, Medicaid and other guaranteed income security programs. Another 13% ($882 billion) went towards required interest payments on the government’s $36.2 trillion in outstanding debt it owes. Combined, these two items accounted for 73% of all government spending. That leaves just 27% ($1.8 trillion) marked as discretionary spending the government has leeway to reduce. However, roughly half of that ($900 billion) is earmarked for military spending.
Returning to the good graces of Moody’s and the other two rating agencies will require difficult, and most likely, unpopular decisions. That’s probably why the continuing debt crisis has been pushed down the line from one administration to the next over the past 20-plus years.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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