The downgrade of the U.S. credit rating has caused turbulence in the global financial markets.

Source: Cointelegraph Original: "US Credit Rating Downgrade Triggers Turbulence in Global Financial Markets"

On May 16, 2025, Moody's Investors Service (Moody's) announced that it would downgrade the U.S. long-term sovereign credit rating to Aa1 from Aaa, the highest rating, ending a 108-year history of top-tier credit ratings in the United States. This is the first time that the three major rating agencies have unanimously downgraded the U.S. credit rating to a non-highest rating, following a 2011 downgrade by Standard & Poor's (S&P) and Fitch in 2023. The cut sparked wild volatility in global financial markets, with investors' concerns about the fiscal health of the United States and the political impasse intensifying.

Background of Moody's Downgrade

Moody's downgrade of the rating is primarily due to the rising fiscal deficit and debt levels of the U.S. federal government. According to Moody's forecast, the federal deficit in the U.S. is expected to rise from 6.4% of GDP in 2024 to nearly 9% by 2035. Furthermore, Moody's noted that the U.S. government lacks effective political consensus in addressing fiscal challenges, which raises questions about long-term fiscal sustainability.

Market response: After initial fluctuations, it tends to stabilize.

U.S. stock futures fell in response to the downgrade. Dow Jones Industrial Average futures fell more than 250 points, while 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 recovering, with the S&P 500 up 0.1%, the Dow Jones up 137 points (0.3%), and the Nasdaq edging higher.

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

Potential impact on consumers and businesses

A downgrade in ratings may lead to an increase in borrowing costs for the U.S. government, thereby raising loan interest rates for consumers and businesses. This means that rates for mortgages, auto loans, and credit cards could rise, increasing the repayment burden on consumers. The rise in financing costs for businesses may suppress investment and expansion, subsequently affecting employment and economic growth.

In addition, the downgrade in ratings may impose constraints on the fiscal policy of the U.S. government. For example, the new round of tax cuts proposed by the Trump administration may face greater fiscal pressure. According to analysis, this tax cut plan could increase the fiscal deficit by $3.3 trillion to $6 trillion over the next decade.

International market response

The downgrade of the U.S. credit rating has also had an impact on global financial markets. European and Asian stock markets have generally fallen, and investors' concerns about the U.S. fiscal situation have spread to global markets. The exchange rates of emerging market currencies against the U.S. dollar have declined, increasing pressure for capital outflows. In addition, the downgrade may affect global investors' confidence in U.S. Treasury bonds, leading to a shift of funds towards the bond markets of other countries.

Outlook: Financial reform is imperative.

Although the market's short-term reaction to the downgrade was relatively mild, in the long term, the U.S. government needs to take effective measures to address the fiscal deficit and debt issues. This includes policies such as reducing spending, increasing taxes, and promoting economic growth. Only through fiscal reform can 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 is 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 uncertainty in the global economy, maintaining fiscal health is crucial for the stability of both the U.S. and the global economy.

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