News: The US Credit Downgrade

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Due to the recent significant development regarding the downgrade of the US credit rating by Moody’s Rating, this week’s article will go over what this means. The post will significantly reference our previous post when the credit rating agency Fitch downgraded the US credit rating in August 2023, as well focus on whether we should be concerned about the size of the US government debt. 

Part I: US Credit Downgrade

What happened

On May 16, 2025, Moody’s Rating announced the downgrade of US debt from the highest AAA (Moody uses ‘Aaa’ notation) rating to the second highest AA+ rating (Aa1), mainly citing “government debt and interest payment ratios [have gotten] to levels that are significantly higher than similarly rated sovereigns”.

Why is this credit rating important

What are credit ratings

To understand the significance of this decision, it is important to first understand what are credit ratings. A credit rating is a measure that confers certain information about the riskiness of default (i.e. the issuer of the debt instrument fails to make a payment) of a particular debt instrument (such as a loan or a bond). For example, giving me a loan is probably riskier than giving a loan to Amazon. A credit rating, therefore, is a representation of the overall risk profile of a debt instrument. To compensate investors for taking on more risk, debt issuers typically have to offer investors a higher interest payment. It is worth adding that credit ratings can be seen as somewhat of a subjective opinion, even though they are partially determined by statistical models.

Why this rating matters

Even though credit ratings are subjective (you and I can rate debt instruments however we want), most market participants have generally accepted the ratings established by three companies – Fitch Ratings, Moody’s Investor Services and S&P Global Ratings – to be the most reliable and important (similar to how Michelin stars are treated as one of the