Moody’s Downgrades U.S. Credit Rating
On the 16th, after the close of the New York market, Moody’s, one of the three major U.S. rating agencies, announced a downgrade of the U.S. credit rating from the top-level Aaa to Aa1, and adjusted the rating outlook from negative to stable. The decision was primarily due to the continually expanding fiscal deficit and the failure of House Republicans to pass a large-scale tax reduction and spending cut proposal.
Main Reason for Downgrade: Expanding Fiscal Deficit
Among the three major rating agencies, Standard & Poor’s downgraded federal debt in 2011, followed by Fitch Ratings in 2023. Following the news of Moody’s downgrade, U.S. Treasury bond prices fell, and the yield on 10-year U.S. Treasury bonds surged to 4.49%.
According to reports, Moody’s stated in a release: “We expect that the federal deficit will widen, reaching nearly 9% by 2035, up from 6.4% in 2024, primarily due to rising debt interest payments, increased welfare spending, and relatively low revenue generation.” Continuing the tax cut policy initiated by Trump in 2017, this is a priority for the Republican-controlled Congress, which is projected to increase the federal primary deficit (excluding interest payments) by $4 trillion over the next decade.
Current Political Stalemate
Reports indicate that the current situation involves Republicans refusing to raise taxes, while Democrats are unwilling to cut spending. On Friday, House Republicans failed to pass a budget committee proposal that included large-scale tax cuts and spending reductions. A small group of far-right Republican lawmakers insisted on deeper cuts to Medicaid and President Biden’s green energy tax incentives, opposing the proposal alongside all Democrats.
Research Agency: Downgrade Has No Impact
What impact will the downgrade of U.S. debt have on the market, especially for Taiwan, which holds a substantial amount of U.S. debt? Jim Bianco, founder of Bianco Research, pointed out on Twitter that in August 2011, Standard & Poor’s was the first to downgrade the U.S. credit rating from AAA to AA+. This immediately triggered chaos, as many derivative contracts, loan agreements, and investment mandates prohibited the use of any securities rated below AAA. Concerns arose that U.S. Treasury bonds would no longer qualify as acceptable collateral, potentially leading to technical defaults for some entities.
Since then, these contracts have been rewritten to include government securities, eliminating the credit rating qualification requirements. This is why in August 2023, when Fitch downgraded the U.S. rating to AA+, the U.S. became a split-rated AA+ country. This downgrade had almost no impact on the bond market. Technically, the overall credit rating of the U.S. did not change, as it was already a split-rated AA+; it is now uniformly rated AA+. He emphasized that no one would take action as a result of this on Monday.
Risk Warning
Investing in cryptocurrencies carries a high level of risk, and their prices can be highly volatile. You may lose your entire principal. Please assess the risks carefully.