US Debt Downgrade: A Global Financial Stability Risk

Growing unease among investors has followed US President Donald Trump's "big, beautiful" tax bill, as the nation's credit rating has been downgraded by Moody's and other major credit-rating agencies. The sheer volume of US debt – now standing at $36 trillion, or 124% of GDP – has led to concerns over rising interest costs, prompting these institutions to conclude that US debt metrics are no longer in line with similarly rated sovereigns. The Trump administration's aggressive fiscal stance, characterized by massive deficit-financed tax cuts, has sparked alarm, with Moody's projecting the US debt-to-GDP ratio to hit 134% by 2035. As the nation's fiscal agenda unfolds, turmoil in the bond market is taking center stage, posing a significant threat to global financial stability.

Key Takeaways:

• The US debt has been downgraded by Moody's to Aa1, following similar decisions by Standard and Poor's (in 2011) and Fitch Ratings (2023).
• The US debt-to-GDP ratio is projected to hit 134% by 2035, according to Moody's, largely due to the $2.5 trillion added to the primary deficit over the next decade (Committee for a Responsible Federal Budget).
• Interest payments on the US federal debt reached $881 billion in 2024, making them one of the largest components of the US federal budget, even surpassing defense and Medicare spending.
• The widespread perception of US Treasury bills as the world's preeminent safe asset has been eroded, with concern over the unsound decision-making of the Trump administration.
• The upshot is that the dollar and dollar-denominated instruments are not only domestic matters for the US government but also global issues that affect everyone, with the potential to unleash widespread financial instability.
• European and Chinese monetary authorities are closely watching the trends indicative of a growing risk aversion and potential for more fiscal uncertainty.
• Developing countries that rely on dollar-denominated debt would be among the hardest hit by rising borrowing costs.
• The Trump administration's actions have far-reaching international repercussions, with the need to reconsider the assumptions and instruments guiding fiscal policy to mitigate the risk of being perceived as a high-risk borrower.

Statistics:

• US debt has reached $36 trillion, or 124% of GDP (Moody's).
• Interest payments on the US federal debt reached $881 billion in 2024.
• The US debt-to-GDP ratio is projected to hit 134% by 2035, according to Moody's.
• The tax bill passed by the House of Representatives would add $2.5 trillion to the primary deficit over the next decade (Committee for a Responsible Federal Budget).
• The 30-year Treasury yield has climbed above 5% in response to the proposed tax bill.
• The US federal budget has a deficit of 6.4% of GDP in 2024.

Sources:

• Moody's
• Standard and Poor's (2011)
• Fitch Ratings (2023)
• Committee for a Responsible Federal Budget
• US Treasury Department