The US government lost its last triple-A credit score from a major international ratings firm after a downgrade by Moody’s Investors Service on May 16, in a bleak milestone for the world’s largest economy.

Explaining the move, Moody’s analysts cited more than a decade of inaction by successive US administrations and Congress to arrest a trend of large fiscal deficits. The government’s debt-interest costs ballooned when inflation spiked in the aftermath of Covid-19, and are forecast to reach $1 trillion this year, up from $263 billion in 2017, according to Congress’s Government Accountability Office.

If anything, the US debt situation is set to get worse, with Republican lawmakers discussing a tax and spending package from President Donald Trump that critics say would add trillions more to the federal debt over the coming decade.

Why did Moody’s downgrade the US?

The US national debt is currently about $36 trillion. It’s the equivalent of about $106,100 for every single person in the country, according to the Peter G. Peterson Foundation, a research group.

S&P Global Ratings downgraded the US back in 2011, and Fitch Ratings did so in 2023. Debt interest costs have been swallowing a growing chunk of government revenues since the era of ultra-low rates vanished in a wave of inflation. Moody’s said federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021.

The federal government spent in excess of $1.8 trillion more than it received in the 2024 fiscal year, marking the fifth year in a row of fiscal deficits above $1 trillion. The GAO, which is seen as an investigative arm of Congress, estimated that unless there’s a change of policy, debt held by the public will be double the size of the national economy by 2047. It called the situation unsustainable and called for decisive action.

Moody’s had flagged as far back as November 2023 that it might lower the US credit rating, when it changed its outlook on the rating to negative from stable.

What does Aa1 mean?

The Aa1 rating now given to the US by Moody’s is its second-highest rating, and is equivalent to the AA+ sovereign grade assigned to the nation by Fitch and S&P.

Moody’s describes Aa1-rated debt as still high in quality and subject to very low risk, compared with its highest-quality Aaa rating, which has minimal risk.

How did we get here?

Put simply, federal tax revenue has failed to keep pace with government spending — especially since the Global Financial Crisis and the coronavirus pandemic, which triggered deep recessions and prompted governments to push through costly economic stimulus packages to sustain employment and investment.

Since the 1980s, various administrations enacted waves of tax cuts as a way to encourage economic activity and boost the personal finances of voting taxpayers, yet failed to curb government spending to make up for the lost fiscal income.

What are the implications?

In other countries, uncontrolled deficits can lead investors to dump the local currency and debt, pushing up interest rates and forcing policymakers to eventually adopt a more responsible fiscal stance.

The role of the dollar as the world’s reserve currency, and the preferred unit of exchange for a large proportion of global trade, has helped to keep a lid on US borrowing costs even as federal deficits ballooned.

The 30-year Treasury yield rose above 5% in the first trading day after the Moody’s rating cut, a psychologically important level because longer-term interest rates have broken above that point on only a limited number of occasions over the past two decades.

How important are US credit ratings?

A rating from a credit scorer is meant to be an independent appraisal of an entity that sells debt. Ratings companies assess the financial strength of borrowers and give them scores ranking their ability to meet debt payments. Investors often rely on credit ratings when making decisions around purchasing new debt from the issuer, so the ratings can play an important role in determining how much interest a borrower needs to pay to raise funds in capital markets.

In the case of the US, credit ratings have relatively limited influence on government borrowing costs as there’s usually strong demand for both the dollar and for US Treasuries, which are considered the world’s benchmark fixed-income asset. The US federal government benefits from a reputation of not having defaulted on its debts and is still viewed as highly unlikely to do so.

Asked about the Moody’s downgrade during an interview on NBC’s Meet the Press with Kristen Welker, US Treasury Secretary Scott Bessent said, “Moody’s is a lagging indicator — that’s what everyone thinks of credit agencies.”

What does the rating move mean for other big borrowers?

The group of nations that still get top marks for creditworthiness is dwindling. Australia, Germany, Singapore and Switzerland are among those still with the top ratings from all three firms, according to data compiled by Bloomberg.

A government’s credit rating can act as a ceiling on the ratings of companies based in those jurisdictions — though not in all cases. Apple Inc., Microsoft Corp. and Johnson & Johnson are among a small cohort of US corporate names with the highest grade from Moody’s.

The US isn’t the only major economy to suffer a rating cut recently. Fitch in April downgraded China’s rating to A from A+, several notches below the US.