Moody's Warns of Deteriorating U.S. Creditworthiness

Would you loan money to Uncle Sam?

That’s becoming a pertinent question as the U.S. government’s fiscal situation continues to deteriorate.

The national debt surged over $36 trillion last fall, and despite some cutting by DOGE, there is no sign that the spending is going to slow down. The proposed federal budget for next year would add trillions to the already massive deficits.

This malfeasance has grabbed the attention of the folks over at Moody’s Ratings.

Last week, Moody’s released a pessimistic report on America’s creditworthiness.

“The US’s fiscal strength is on course for a continued multiyear decline, driven by widening federal budget deficits, a rising debt burden and falling debt affordability.”

In November 2023, Moody’s lowered its outlook on the U.S. government credit from “stable” to “negative.” This is often a prelude to a downgrade in the country’s AAA credit rating.

Moody’s is the last of the major credit rating agencies to keep U.S. debt at a AAA rating. Standard & Poor’s (S&P) cut the U.S. sovereign rating a notch from AAA to AA+ way back in 2011. Fitch followed suit last year, citing “the expected fiscal deterioration over the next three years.”

In its most recent outlook, Moody’s said U.S. fiscal disorder would be a problem even in the absence of a trade war and the potential for an economic downturn due to rising interest rates.

"Even in a very positive and low probability economic and financial scenario, debt affordability remains materially weaker than for other AAA-rated and highly rated sovereigns." 

Interest on the national debt cost $85.87 billion in February. That brought the total interest expense for the fiscal year to $478.05 billion, up 10.3 percent over the same period in 2024.

So far in fiscal 2025, the federal government has spent more on interest on the debt than it has on national defense ($399 billion) or Medicare ($443 billion). The only higher spending category is Social Security. 

Uncle Sam paid $1.13 trillion in interest expenses in fiscal 2023. It was the first time interest expense has ever eclipsed $1 trillion. Projections are for interest expense to break that record in fiscal 2025.

Much of the debt currently on the books was financed at very low rates before the Federal Reserve started its hiking cycle. Every month, some of that super-low-yielding paper matures and has to be replaced by bonds yielding much higher rates. And even with the recent Federal Reserve rate cuts, Treasury yields have pushed upward as demand for U.S. debt sags. 

The dollar’s status as the world’s reserve currency and its overall strength globally has allowed the federal government to maintain its credit rating despite the irresponsible borrowing and spending in Washington D.C. However, Moody’s asserts that the dollar’s status is getting shaky, and the trade war drama further complicates the U.S. debt picture.

"We see diminished prospects that these strengths will continue to offset widening fiscal deficits and declining debt affordability." 

The Bipartisan Policy Center recently pointed out that the growing national debt and the mounting fiscal irresponsibility undermine the dollar. 

“Confidence in U.S. creditworthiness may be undermined by a rapidly deteriorating fiscal situation, an increasing concern with federal debt set to grow substantially in the coming years.”

We can see the shakiness in the dollar’s status through escalating de-dollarization efforts around the world.

Many seem optimistic that the U.S. can get its fiscal house in order. They cite the success of DOGE in ferreting out wasteful spending. But Moody’s said DOGE cuts will be “small relative to mandatory spending and unlikely to result in significant savings over the near term.”

The reality is that even if the Trump administration manages to slash discretionary spending as promised, it only accounts for 27 percent of total spending. The vast majority is for entitlements, and there is little political will to take the scissors to Social Security or Medicare.

Making matters worse, Congress seems reluctant to get on board based on its proposed budget and the recent continuing resolution that fully funded much of the spending pinpointed by DOGE.

Given the gloomy Moody’s report, it might not be long before the agency downgrades U.S. debt, giving U.S. politicians another black eye.

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