Market News

BY  Melissa Lawford

The United States has been stripped of a prized top credit rating for the first time, as fears rise that the Trump administration will not tackle its soaring debts.

Moody’s has downgraded America’s credit rating to Aa1, down one notch from Aaa, amid warnings over soaring deficit and debt interest costs.

The US has now lost its triple-A rating from all three major credit rating agencies, after Fitch made a similar downgrade in 2023. S&P Global downgraded the US in 2011.

It means the US can no longer claim to hold the esteemed rating, which allows countries to borrow at the lowest possible rates.

Moody’s said its action “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns”.

However, the agency signalled that the president’s plans played a part in its decision to downgrade as it warned that the outlook for US finances was worsening.

It said: “The US’s fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”

It comes as Mr Trump tries to get major tax cuts signed off by lawmakers, which will add further strain to America’s budget.

The downgrade means that US government debt is higher risk. In turn, this could mean that bond investors may demand even higher yields on US treasuries, further adding to borrowing costs.

Hard-line conservatives blocked Mr Trump’s enormous tax and spending bill over cost concerns in a key House committee on Friday.

Mr Trump’s plans to extend his 2017 Tax Cuts and Jobs Act will add around $4 trillion to the federal deficit over the next decade, Moody’s said.

Higher debt interest costs and low tax revenue mean the deficit will rise to nearly 9pc of GDP by 2035, up from 6pc in 2024, Moody’s said.

US federal government debt will rise to 134pc of GDP over the same period, up from 98pc in 2024.

Mr Trump’s plans have already been challenged by US borrowing costs. He was forced to row back on the aggressive “reciprocal” tariffs he announced at the start of April after a bond market revolt against him.

His “liberation day” tariffs sent yields on US treasuries soaring as investors rapidly shed US assets, driving up the government’s debt costs and forcing him to announce a policy about-turn a week later.

US debt has been climbing fast for more than a decade because the government operates with a large deficit, meaning it spends more than it collects in tax revenue. It is now approaching $37 trillion.

This accelerated during the pandemic, when the US ramped up spending. Meanwhile, tax cuts such as those introduced in Mr Trump’s first term have reduced income.

At the same time, higher interest rates since the pandemic mean the cost of servicing this debt burden has soared.

Moody’s noted that “recent months have been characterised by a degree of policy uncertainty”.

Mr Trump’s aggressive tariff policies have triggered huge swings in markets, while his plans for major tax cuts mean there is a large question mark over the future of government borrowing.

However, Moody’s also adjusted its outlook for the US up from negative to stable.

Although Mr Trump’s trade war will mean slower GDP growth in the short-term, Moody’s said it did not expect a long-term toll.