Source: Cointelegraph
Original: “U.S. Credit Rating Downgrade Triggers Turmoil in Global Financial Markets”

On May 16, 2025, Moody's Investors Service announced the downgrade of the United States' long-term sovereign credit rating from the highest level of Aaa to Aa1, ending the U.S.'s 108-year history of top credit ratings. This marks the first time that all three major rating agencies have unanimously downgraded the U.S. credit rating to a non-top tier, following Standard & Poor's (S&P) downgrade in 2011 and Fitch's downgrade in 2023. The downgrade has triggered significant volatility in global financial markets, with investors increasingly concerned about the U.S. fiscal health and political deadlock.

Background of Moody's Downgrade

The primary reason for Moody's downgrade is the rising fiscal deficit and debt levels of the U.S. federal government. According to Moody's forecasts, the federal deficit is expected to rise from 6.4% of GDP in 2024 to nearly 9% by 2035. Additionally, Moody's pointed out that the U.S. government lacks effective political consensus in addressing fiscal challenges, leading to questions about long-term fiscal sustainability.

Market Reaction: Initial Turmoil Followed by Stabilization

Following the announcement of the downgrade, U.S. stock market futures fell sharply. The Dow Jones Industrial Average futures dropped by over 250 points, and the S&P 500 and Nasdaq futures also saw significant declines. However, during the day's trading, the market gradually digested the news, with major stock indices rebounding; the S&P 500 rose by 0.1%, the Dow Jones increased by 137 points (0.3%), and the Nasdaq saw a slight uptick.

In the bond market, the yield on 10-year U.S. Treasury bonds briefly rose to 4.55% before retreating to 4.45%. The yield on 30-year Treasury bonds also briefly surpassed 5%, reaching a new high since 2023. The dollar depreciated against major currencies, while gold prices increased, reflecting investors' concerns about the U.S. fiscal situation.

Potential Impact on Consumers and Businesses

The downgrade may lead to higher borrowing costs for the U.S. government, which could, in turn, raise loan rates for consumers and businesses. This means that interest rates on mortgages, auto loans, and credit cards may increase, adding to the repayment burden for consumers. The rise in corporate financing costs could suppress investment and expansion, thereby affecting employment and economic growth.

Moreover, the downgrade could constrain the U.S. government's fiscal policy. For instance, the new round of tax cuts proposed by the Trump administration may face greater fiscal pressure. According to analyses, this tax cut plan could increase the fiscal deficit by $3.3 trillion to $6 trillion over the next decade.

International Market Reaction

The downgrade of the U.S. credit rating has also impacted global financial markets. European and Asian stock markets generally fell, as investors' concerns about the U.S. fiscal situation spread to global markets. Currencies of emerging market countries depreciated against the dollar, increasing capital outflow pressures. Additionally, the downgrade may affect global investors' confidence in U.S. Treasury bonds, leading to a shift of funds to bond markets in other countries.

Outlook: Fiscal Reform is Imperative

Although the market's short-term reaction to the downgrade has been relatively mild, in the long run, the U.S. government needs to take effective measures to address the fiscal deficit and debt issues. This includes policies such as cutting spending, increasing taxes, and promoting economic growth. Only through fiscal reform can investor confidence in the U.S. fiscal situation be restored, maintaining the international status of the dollar and the attractiveness of U.S. Treasury bonds.

Moody's downgrade serves as a warning about the U.S. fiscal situation, reminding the government and investors to pay attention to long-term fiscal sustainability. In the context of increasing global economic uncertainty, maintaining fiscal health is crucial for the stability of both the U.S. and the global economy.

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