On the 17th, the international credit rating agency Moody's downgraded the United States' national credit rating from the highest 'triple-A (Aaa)' to 'Aa1,' leading to evaluations that the 'exceptionalism' enjoyed by the U.S. has been compromised.
Moody's cited the U.S. national debt of $36 trillion (approximately 5 quadrillion won), an annual budget deficit of $2 trillion, and political deadlock as the reasons for the downgrade.
The U.S. credit rating downgrade is the third following Standard & Poor's (S&P) in 2011 and Fitch in 2023. This means that the U.S. has lost its 'top-tier credit' status from all three major credit rating agencies for the first time in 108 years since 1917.
Economic experts are concerned that this downgrade is not just a simple deterioration in fiscal indicators but also a sign of structural fractures in the economic hegemony held by the U.S.
On the 18th (local time), CNN reported, 'The concerns of investors watching the direction of the U.S. budget deficit have become a reality' and noted, 'It will have a significant impact on the stock and bond markets.'
The global financial market was immediately engulfed by shock following S&P's downgrade of the U.S. credit rating in 2011. The Dow Jones index on the New York Stock Exchange plummeted 5.6% immediately after the downgrade. The yield on U.S. 10-year Government Bonds surged from 2.5% to 3.2% (indicating a decline in bond value).
Thank goodness the value of the U.S. dollar only dropped by 2.3% against the euro. At that time, the dollar acted as a relatively safe asset due to the European debt crisis.
This year is different. The dollar's position as a reserve currency is rapidly shaking. Since the beginning of the year, the U.S. dollar has already depreciated by 6% compared to the fourth quarter of last year. The proportion of U.S. bonds held by foreigners has also plummeted from 50% in 2014 to just 33% now.
The Financial Times (FT) reported, 'Funds are visibly moving to alternative assets like the Chinese yuan or Bitcoin instead of the dollar.'
According to a report released by Moody's on the 17th, 'The U.S. national debt has reached 134% of gross domestic product (GDP), and the annual budget deficit has exceeded $2 trillion,' and pointed out that 'both the administration and Congress have failed to address the issues of large fiscal deficits and rising interest expense.'
It is pointed out that 'political dysfunction' accumulated since the 1970s has swelled the liability. The Congressional Budget Office (CBO) has repeatedly warned that this year's interest expense will exceed 30% of revenue.
According to the Government Accountability Office (GAO), the total interest expense paid by the U.S. on Government Bonds last year reached $882 billion (approximately 1.24 trillion won). This interest expense alone ballooned to the level of Medicare (national health insurance for the elderly and disabled) or the entire defense budget. Last year's U.S. defense spending was recorded at $886 billion.
Immediately after the downgrade by Moody's, the yield on U.S. 10-year Government Bonds jumped over 5 basis points (1 basis point is 0.01 percentage points), reaching 4.49%. In contrast, the S&P 500 ETF fell 0.6% after market close.
U.S. Treasury Secretary Scott Vasant dismissed Moody's as a lagging indicator in an interview with NBC News on the 18th, stating, 'Everyone thinks that way about credit rating agencies' and remarked, 'I don't trust Moody's much.'
This merely reiterates the existing position that the budget deficit was inherited from the previous administration of Joe Biden.
In the short term, the financial market is on the sidelines. Dave Maja, CEO of Roundhill Investments, said in an interview with Bloomberg, 'Unlike in 2011 when S&P downgraded, this time the market is already aware of U.S. fiscal risks, so the shock may be limited.'
However, there are significant concerns in the long term. Max Gokman, Chief Investment Officer (CIO) of Franklin Templeton, warned, 'If large investors begin to gradually replace U.S. Government Bonds with other safe assets, the pressure on U.S. interest rates to rise and the value of the dollar to decline could intensify.'
If the dollar's depreciation and credit rating downgrade coincide, the U.S. economy is at greater risk of falling into a vicious cycle of slowing growth due to rising borrowing costs and deteriorating fiscal conditions.