{"id":224142,"date":"2025-05-19T09:45:00","date_gmt":"2025-05-19T13:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=224142"},"modified":"2025-05-27T12:50:29","modified_gmt":"2025-05-27T16:50:29","slug":"americas-credit-strength-just-got-cut-again-should-you-panic","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/americas-credit-strength-just-got-cut-again-should-you-panic\/","title":{"rendered":"America’s Credit Strength Just Got Cut Again: Should You Panic?"},"content":{"rendered":"\n

Moody’s Ratings has officially stripped the U.S. of its final AAA credit score \u2014 the highest mark of financial credibility \u2014 sparking political uproar and media alarm, yet market analysts and economists widely believe it will have limited impact on the broader financial system.<\/a><\/p>\n\n\n\n

What Did Moody’s Decide About US Credit Rating?<\/h3>\n\n\n\n

Moody’s cut the U.S. long-term sovereign credit rating to Aa1 from Aaa on Friday, citing sustained fiscal deficits, rising debt burdens and growing interest costs.<\/p>\n\n\n\n

The agency criticized “successive U.S. administrations and Congress” for failing to implement a credible debt reduction strategy.<\/p>\n\n\n\n

This move aligns Moody’s with Fitch Ratings, which downgraded the U.S. in August 2023, and S&P Global Ratings, which cut the rating back in 2011.<\/p>\n\n\n\n

For the first time, all three major credit agencies have the U.S. rated below AAA.<\/p>\n\n\n\n

S&P<\/strong><\/th>Moody\u2019s<\/strong><\/th>Fitch<\/strong><\/th><\/tr>
AA+<\/th>Aa1<\/th>AA+<\/th><\/tr><\/thead><\/table><\/figure>\n\n\n\n

Do Markets Care This Time?<\/h3>\n\n\n\n

“This downgrade won’t force anybody to do anything on Monday,” said Jim Bianco <\/strong>of Bianco Research.<\/p>\n\n\n\n

He noted that after S&P\u2019s 2011 downgrade caused market disruption due to contract language requiring AAA-rated collateral, those rules were rewritten. “Now, these contracts reference \u2018government securities,’ not ratings,” he said.<\/p>\n\n\n\n

Bianco added, “So technically it didn’t even change the US’s overall credit rating because it was already split rated AA+. Now it’s unanimous AA+. Nothing changed.”<\/p>\n\n\n\n

Debt Concerns Are Misguided<\/h3>\n\n\n\n

Macro analyst Alfonso Peccatiello<\/strong> also challenged the logic behind the downgrade. He indicated that U.S. debt in its own currency is not inherently dangerous.<\/p>\n\n\n\n

“Any government doing deficit spending and issuing bonds in its own currency\u2014like the U.S.\u2014isn’t walking into an abyss of doom,” Peccatiello said. “It’s just choosing to stimulate the economy by printing money for the private sector.”<\/p>\n\n\n\n

Addressing concerns about the $1 trillion annual interest burden, he said this is simply money being transferred from the government to investors holding Treasury bonds.<\/p>\n\n\n\n

“For every dollar the U.S. pays in interest, there is an investor making that dollar,” he said, framing it as a redistribution within the economy, not a red flag of insolvency.<\/p>\n\n\n\n

Peccatiello explained that U.S. Treasuries continue functioning as high-quality liquid assets for banks under Basel regulations.<\/p>\n\n\n\n

“The downgrade to AA+ wouldn’t make any difference,” he said, as government bonds rated between AAA and AA- carry the same 0% risk weighting under Basel’s framework.<\/p>\n\n\n\n

He said rising deficits only become problematic when they cause inflation or resource scarcity\u2014not because of arbitrary credit score thresholds.<\/p>\n\n\n\n

According to Peccatiello, long-term bond yields are already pricing in much of the fiscal outlook, making current levels\u2014particularly 30-year Treasuries above 5.25%\u2014increasingly attractive for accumulation.<\/p>\n\n\n\n

More Politics Than Panic<\/h3>\n\n\n\n

Economist Mohamed El-Erian<\/strong> called the move “historic,” but said it was unlikely to shake global markets.<\/p>\n\n\n\n

However, he added that the downgrade “amplifies the conversation about America\u2019s political ability to address its fiscal deficit and debt trajectory.”<\/p>\n\n\n\n

El-Erian\u2019s view mirrors market action: U.S. Treasuries remain the most trusted collateral globally, and their deep liquidity shields them from dramatic dislocations.<\/p>\n\n\n\n

Political Reactions And The Trump Administration’s Position<\/h3>\n\n\n\n

Treasury Secretary Scott Bessent<\/strong>, speaking on CNBC, called Moody’s decision “a lagging indicator.”<\/p>\n\n\n\n

He said, “We inherited a 6.7% deficit-to-GDP ratio, the highest when we weren’t in a recession or at war. We are determined to bring spending down.”<\/p>\n\n\n\n

Bessent added that foreign capital flows remain robust. “Saudi Arabia, Qatar, and the UAE are pushing more and more money into the U.S., with 10-year investment plans,” he said.<\/p>\n\n\n\n

Wall Street Shakes On The Downgrade<\/h3>\n\n\n\n

Despite widespread commentary downplaying Moody’s downgrade of U.S. debt, investors reacted defensively in Monday’s premarket, with major equity futures sliding and high-growth tech stocks leading losses.<\/p>\n\n\n\n

S&P 500 futures fell 1%, while Nasdaq 100 contracts dropped 1.5%, signaling a risk-off tone ahead of the Wall Street open.<\/p>\n\n\n\n

Among mega-cap stocks, the worst-hit names in premarket trading:<\/p>\n\n\n\n