The United States is currently facing a challenging year as a damaging trade war, a shaky stock market, and a global sell-off of US assets unfold, prompting new warnings regarding the nation’s prestigious credit rating.
S&P Global Ratings reported on April 14 that it may downgrade the US credit rating, currently at AA+, if certain fiscal situations continue to deteriorate.
This bleak forecast is drawn from concerns surrounding the nation’s gargantuan debt levels and ongoing political dysfunction.
S&P stated, “The outcome of the US government’s budget process and policy negotiations over the coming months will help determine policies that inform our view of US sovereign creditworthiness.”
The agency noted that the ongoing budget discussions could significantly influence its assessment of the US fiscal profile.
S&P was the first agency to downgrade the US credit rating in 2011, following a congressional standoff over raising the borrowing limit that nearly prevented the Treasury Department from fulfilling its financial obligations.
At that time, the total national debt sat at approximately $15 trillion, with the portion held by the public at 66% of GDP.
Fast forward to the present day, the national debt has ballooned to $36 trillion, with public debt reaching about 100% of GDP.
Given the deteriorating debt outlook, Fitch made headlines by downgrading the US credit rating from AAA to AA+.
Simultaneously, Moody’s shifted its outlook on US creditworthiness from stable to negative.
In March, Moody’s articulated concerns regarding escalating costs tied to financing the burgeoning government debt amid rising interest rates.
They warned, “The US fiscal strength is on course for a continued multiyear decline.”
S&P expanded on its concerns, specifically regarding the policy directions encouraged by President Trump and congressional Republicans.
In addition to the massive size of the government’s debt, they pointed to a budgeting gimmick under consideration by congressional Republicans in relation to the tax cut bill being discussed in Washington.
This method of accounting, known as the “current policy baseline,” would significantly underrepresent the added costs of tax cuts on the debt, potentially enabling tax cuts financed through borrowing at a level that Congress would be unable to achieve without this maneuver.
S&P commented, “The adoption of an unprecedented accounting approach in the budget resolution and reconciliation process reinforces the lack of clarity about the magnitude of future deficits.”
This comment signals a stern warning to legislators that financial misrepresentation could lead to a downgrade in the nation’s credit rating.
In addition, S&P offered insights regarding the impending need for Congress to address the debt ceiling, a decision they are expected to tackle this summer.
S&P stated optimistically, “We expect Congress will act in a timely manner with some form of legislation to raise or suspend the debt ceiling before the Treasury runs out of space.”
However, they warned that a repeat of the 2011 standoff, which saw the government come close to defaulting, would be detrimental.
Concerns have also been raised about President Trump’s protective tariffs, which analysts predict will inevitably increase costs and prices, hamper economic growth, and elevate unemployment rates.
Some experts even suggest that Trump’s aggressive trade policies could potentially trigger a recession.
Economic downturns have historically proven to be detrimental to federal budgets since they lead to declines in corporate and individual tax revenues, while Congress often enacts stimulus measures to facilitate recovery.
Notably, the largest budget deficits usually occur during recessions.
S&P also highlighted uncertainties tied to Trump’s immigration policy, particularly his plans to deport thousands of migrants, which may remove a substantial number of workers and further hinder growth amid existing labor shortages.
Additionally, they emphasized the increasing political polarization in the US compared to similarly rated countries, pointing to the challenges in achieving bipartisan cooperation necessary to enhance the US’s fiscal dynamics.
The 2011 downgrade by S&P led to a significant sell-off in the stock market and concerns over a potential debt crisis that could cause borrowing costs to soar for the US government.
Nevertheless, the anticipated crisis failed to manifest, as the Treasury continued to issue debt at some of the most competitive interest rates in the world, suggesting that investors retained faith in the US’s creditworthiness.
However, signals indicate a shift may be underway. Recently, drastic tariffs imposed by Trump on imports exceeding hundreds of billions of dollars have begun reshaping global investment flows, which indicates a potential erosion of trust in the US as a safe economic haven.
Investors have been selling American stocks and US Treasury securities simultaneously, a rare occurrence as Treasuries typically represent the safest asset class sought after when investors shy away from riskier stocks.
This emerging “Sell America” trend could gain traction if S&P indeed follows through with a downgrade, particularly in conjunction with Moody’s anticipated downgrade first indicated in March.
While the US economy retains strength, it is not immune to the persistent hurdles posed by political maneuvering.
The trajectory of this year could worsen, leading to even graver consequences for the nation’s fiscal health and credit outlook.
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