Why Was the Credit Rating of U.S. National Debt Downgraded? What Are the Implications for Taiwan, Which Holds a Significant Amount of U.S. Treasury Securities? An Analysis by Research Institutions.
Moody’s Downgrades U.S. Credit Rating
On the 16th, after the close of the New York market, Moody’s, one of the three major credit rating agencies in the United States, announced a downgrade of the U.S. credit rating from the top-level Aaa to Aa1, and adjusted the rating outlook from negative to stable. The primary reason for this change is attributed to the continuously expanding fiscal deficit and the failure of House Republicans to pass a large-scale tax reduction and spending cut plan.
Main Reason for Downgrade: Expanding Fiscal Deficit
Among the three major rating agencies, Standard & Poor’s downgraded federal debt in 2011, followed by Fitch Ratings in 2023. Following the announcement of Moody’s downgrade, U.S. Treasury bond prices fell, with the yield on the 10-year U.S. Treasury bond surging to 4.49%.
According to reports, Moody’s stated in a release, “We expect the federal deficit to grow, reaching nearly 9% by 2035, up from 6.4% in 2024, primarily due to increased debt interest payments, rising welfare expenditures, and relatively low revenue generation.” Continuing the tax reduction policy initiated by Trump in 2017, this remains a priority for the Republican-controlled Congress, which is projected to increase the federal primary deficit (excluding interest payments) by $4 trillion over the next decade.
Reports indicate the current situation is characterized by Republicans refusing to raise taxes while Democrats are unwilling to cut spending. On Friday, House Republicans failed to pass a budget committee proposal that included significant tax cuts and spending reductions. A small group of far-right Republican lawmakers insisted on greater cuts to Medicaid and President Biden’s green energy tax credits, joining all Democrats in opposing the proposal.
Research Institutions: Downgrade Has No Impact
As for the impact of the U.S. credit rating downgrade on the market, particularly for Taiwan, which holds a significant amount of U.S. debt, Jim Bianco, founder of Bianco Research, noted on Twitter that in August 2011, Standard & Poor’s was the first to downgrade the U.S. credit rating from AAA to AA+. This triggered a period of chaos at the time. The reason for the turmoil was that many derivative contracts, loan agreements, and investment directives prohibited the use of any securities rated lower than AAA. Concerns that U.S. Treasury bonds would no longer qualify as acceptable collateral could lead to technical defaults for some parties.
Following that, these contracts were rewritten to refer to government securities, excluding credit rating qualifications. This explains why in August 2023, when Fitch downgraded the U.S. rating to AA+, the United States became a split-rated AA+ country. This downgrade had virtually no impact on the bond market. Technically, the overall credit rating of the U.S. did not change, as it was already split-rated AA+; it is now consistently rated AA+. He emphasized that no one would take action on Monday due to this downgrade.
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