May 18 2025 - 5:00pm
On Friday, the rating agency Moody’s finally joined its two principal rivals, Fitch and S&P, in stripping the US government of its perfect AAA credit rating. In doing so, it cited rising debt and budget deficit, and changed its outlook for US public finances from stable to negative.
As a market-moving action, this probably won’t matter much. Yields on the benchmark 10-year bond rose a notch following the news, but this arguably reflected existing worries among investors as much as anything else. US bond yields have been rising for years now. And in warning that the deficit was on track to reach 9% of GDP by 2035, and that there was no apparent plan to alter this trajectory, Moody’s didn’t reveal anything that market-watchers didn’t already know. What’s more, while many institutional investors are required to maintain a part of their portfolio in the safest securities, the scale of the downgrade isn’t such that many positions will be forced to liquidate. As a result, there is unlikely to be a run on US bonds just yet.
Nevertheless, the development is symptomatic of a looming problem in America’s finances, one which could reach boiling point later this year. It’s not clear when global patience with US profligacy will run out, but there have been growing signs of dissatisfaction among investors in recent months. Meanwhile, the volatility of the Trump administration’s policymaking has led some international fund managers to reconsider their degree of exposure to US assets.
Aside from a handful of Congressional Republicans, few in the political class give deficit concerns much more than lip service. Donald Trump’s “Big Beautiful Bill”, which aims to extend the 2017 tax cuts and was blocked in the House of Representatives on Friday, would either blow up the deficit, cut benefits, or simply continue to linger indefinitely in the halls of the Capitol.
None of these three scenarios would make US debt a more attractive option. The first would add a further $5 trillion to the existing debt stock of $36 trillion, according to estimates by the Committee for a Responsible Federal Budget. With US borrowing thus continuing to grow considerably faster than the economy, the country would risk either struggling with the burden of debt repayments — raising the spectre of a default — or inflating its way out of debt by allowing prices to rise faster than interest rates. Either way, investors would stand to lose money.
The second scenario, of sweeping cuts to public pensions and healthcare, could induce a political crisis and create a powerful anti-incumbent mood. It is therefore far from a sustainable option. The last scenario, of the budget-haggling continuing indefinitely, would add to the high degree of uncertainty already plaguing American politics. Given that major investments are often put on hold until long-term government plans become clear, this would slow the economy and curtail a stock market relief rally that already looks suspiciously fragile.
Whichever of these scenarios comes to pass, things will likely come to a head in the next few months. Given that this time will overlap with the end of Trump’s 90-day moratorium on tariffs, at which point he’ll have to decide whether to extend or scrap them altogether, anxiety levels among investors could well reach fever pitch.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).
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