U.S. Government on Verge of Losing Last AAA Credit Score

Standard and Poor, Fitch Ratings, and Moody’s Investors Service are the “Big Three” credit scoring agencies that assign grades to the creditworthiness of governments. That matters because governments with good grades get to borrow money more cheaply than governments with low grades do. Governments that manage their fiscal policies well get the best credit scores and the lowest interest rates for the money they borrow.

Once upon a time, all three rating agencies awarded the U.S. government their top “triple A” credit score. But over time, the leadership of the U.S. government came to believe that was a grade they deserved and could never lose. They all but stopped doing the hard work needed to earn and keep it.

After that happened, it was only a matter of time before the proverbial dominoes began falling in the form of credit rating downgrades. First in slow motion, then with increasing speed.

The Dominoes Begin to Fall

The first domino fell during the administration of President Barack Obama and Vice President Joseph Biden in August 2011. Standard & Poor stripped the U.S. government of its AAA credit rating. The second domino fell in August 2023 under the administration of President Joseph Biden, when Fitch Ratings pulled its top grade of the U.S. government’s creditworthiness.

Moody’s Investor Services, the third and now only government credit scorer that has not yet yanked its Triple-A grade from the U.S. government, said on September 25 that they are on the verge of following suit. The Hill‘s Julia Shapero reports:

Moody’s Investors Service warned Monday that a government shutdown could have a negative impact on the U.S.’s credit rating, as Congress struggles to reach a deal before funding runs out on Saturday.

A shutdown would be “credit negative” for the country, even if it is short lived and results in limited disruption to the economy, Moody’s said.

“[It] would underscore the weakness of US institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years,” the rating agency wrote in Monday’s report.

The U.S. currently holds the highest possible rating — “Aaa” — from Moody’s. However, a shutdown would “demonstrate the constraints that intensifying political polarization” has placed on fiscal policymaking in the U.S., the rating agency said.

“Looking ahead, weaker fiscal policymaking that leads to persistently high fiscal deficits and higher than expected interest costs would put pressure on the US rating or outlook,” Moody’s added.

Why Is the U.S. Government on the Verge of Losing Its Top Credit Rating?

The leadership of the U.S. government’s failure to restrain the growth of government spending has very real and predictable consequences. Excessive spending has created today’s high fiscal deficits and higher-than-expected interest costs. Axios’s Felix Salmon simply explains why that fiscal reckoning is now upon us.

The big picture: The U.S. government has lost control of its own spending, both in the short term and in the long term. That was the message sent by Fitch when the ratings agency downgraded the U.S. last month, and it’s the message that was sent Monday by Moody’s as we hurtle toward a government shutdown on Oct. 1.

Salmon also summarizes what each of the three major government credit-rating firms have said about why they either have or would downgrade the U.S. government’s credit rating.

• Standard & Poor’s determined those conditions were no longer met back when it stripped the U.S. of its triple-A credit rating in 2011, citing a weakening in “the effectiveness, stability, and predictability of American policymaking and political institutions.”
• Fitch agreed when it announced its downgrade in August, saying “there has been a steady deterioration in standards of governance over the last 20 years” and that “repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
• Moody’s has now weighed in as well. Its note on the “potential credit implications of a government shutdown” bemoans “the weakness of US institutional and governance strength” and the “fractious bipartisan politics around a relatively disjointed and disruptive budget process.” A downgrade from the agency is now a real possibility.

Absent major improvements in U.S. leadership, it’s just a matter of time before Moody’s joins the other two agencies and downgrades the U.S. government’s credit rating. The game of politicians and bureaucrats to keep kicking the fiscal reform can down the road is increasingly becoming one Americans cannot afford to continue.