This decision marks the crystallization of persistent concerns about the US budgetary trajectory, which remains mired in growing debt and chronic deficits. Although widely anticipated by the markets, this downgrade highlights an economic reality that is difficult to ignore.

The oracles of finance: how do the agencies rate?

Three names dominate the landscape: Standard & Poor's, Moody's, and Fitch. Their job? To assess the ability of countries to meet their financial commitments. Their method? A clever mix of economic, political, and institutional indicators.

Economic criteria (known as quantitative criteria):

  • GDP and growth: The stronger and more dynamic the economy, the more sustainable the debt appears.

  • Inflation: This reflects the credibility of monetary policy. Since 2021, the United States has had an average inflation rate of 4.95% per year (compared to 1.9% between 2011 and 2015).

  • Budget deficit: It is not so much the deficit itself that is worrying, but what is done with it. Investing in growth is acceptable; repaying interest with new loans is much less so. In 2024, the deficit will reach 6.4% of GDP. Moody's anticipates that it will rise to 9% within ten years.

  • Public debt: This currently stands at 121% of GDP, compared with 100% in 2015.

Some recent figures:
In the first six months of fiscal year 2025 (October 2024 - March 2025), the US deficit jumped 23% compared to last year, reaching $1.3 trillion. Revenue grew by only 3% to $2.3 trillion, while spending rose by 10% to $3.6 trillion.

Political and institutional criteria (known as qualitative criteria):

  • Political stability: Consistent governance inspires confidence.

  • Legitimacy: A robust democracy promotes fiscal discipline.

  • Effectiveness: The ability to adopt and implement relevant policies is crucial.

Limited but symbolic consequences

The agencies do not have information that the markets do not already know. Investors are well aware of the US budget situation and political tensions. The market reaction has therefore been measured. Ten-year Treasury bond yields have risen only slightly.

This announcement adds tension to an already feverish bond market. The 30-year rate has once again crossed the closely watched 5% threshold.

However, a downgrade is not without consequences. It can increase borrowing costs, complicate access to capital, and tarnish a country's image amongst international institutions. A triple-A rating remains a guarantee of fiscal responsibility. Losing it sends a signal.

Given the importance of refinancing in the United States this year, with more than a third of US debt due to be refinanced on the markets over the next 10 months, one can imagine the tension in the White House, which has made lowering long-term rates a priority.

Scott Bessent, US Treasury Secretary, attempted to downplay the downgrade by describing it as a "lagging indicator," attributing the decision to spending under the Biden administration.

Meanwhile, the Trump administration does not seem to be making debt reduction a priority. A tax cut plan, inherited from Donald Trump's first term, is currently being debated in Congress. According to Moody's, its adoption would increase the deficit by $4 trillion over the next ten years.

As for businesses, their debt market should not be affected.

The last ones standing

In a world where debt is becoming the norm, only a handful of countries still hold the coveted triple-A rating from S&P and Moody's. Two decades ago, there were 20; now there are only ten that tick all the boxes:

  • Australia, Canada, Denmark, Germany, the Netherlands, Luxembourg, Sweden, Norway, Singapore, and Switzerland.

Let's add Liechtenstein, which is not rated by Moody's but has a triple A rating from S&P. Note that S&P does not share Moody's view on New Zealand, which it rates one notch lower at "AA+".

Since 2012, three countries have been downgraded alongside the United States; Canada, the United Kingdom, and Hong Kong.

Often perceived as technocratic, the decisions of rating agencies are nevertheless highly informative. They reveal the underlying state of a country, its trajectory and the confidence that can be placed in it. By losing its triple A rating, America is not just losing a symbol. It is losing a benchmark.

(here is an article on the dollar's reaction)