America Loses Its Last AAA Rating

5 min read

On 16 May Moody's cut the credit rating of the United States from Aaa to Aa1. It was the last of the three major rating agencies to hold America at the top grade. Standard and Poor's moved first in 2011. Fitch followed in 2023. Now none of the three rates the issuer of the world's reserve currency as a perfect borrower. Markets shrugged within days. The message should not be shrugged off so easily.

What a credit rating is

A credit rating is a judgement on how likely a borrower is to repay in full and on time. Agencies rate companies, banks and governments. The top grade tells lenders that the risk of not being paid back is as low as it gets. The lower the grade, the higher the interest a borrower is usually asked to pay, which is why governments care so much about keeping it.

A one notch cut from Aaa to Aa1 does not mean the United States is about to stop paying its debts. Aa1 is still a very high grade. What matters is the direction of travel. The agency is saying that the finances of the world's largest borrower have been getting worse for years and that it does not expect this to change.

Why Moody's acted

The reasons were plain. Moody's said that successive US administrations and Congress had failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. It expects the federal deficit to widen from 6.4% of national output in 2024 to nearly 9% by 2035.

In its own words, Moody's pointed to "the increase over more than a decade in government debt and interest payment ratios". It said it did not believe that "material multi-year reductions in mandatory spending and deficits" would result from the plans now being discussed. The warning had been building for some time. Moody's had lowered its outlook on the United States to negative in November 2023, a step that often comes before a downgrade.

Federal debt now stands above $36 trillion. Interest on that debt cost more than the entire US defence budget last year. As old borrowing is refinanced at today's higher rates, that bill keeps climbing. Meanwhile Congress is debating a budget bill that would add trillions more to the debt over the next decade.

The numbers behind the decision

The projections are stark. Federal debt was around 98% of the size of the US economy in 2024. On current plans it is expected to reach 134% by 2035. Interest payments took roughly 18% of federal revenue in 2024. By 2035 they are expected to take around 30%.

That last figure is the one to watch. When nearly a third of every tax dollar goes on interest, less is left for everything else a government does. The usual responses are to borrow more, cut spending, raise taxes or let inflation do some of the work. None is painless, which is why the problem tends to be passed from one government to the next.

How markets responded

The first reaction was in the bond market. The yield on 30-year US Treasury bonds rose above 5% in the days after the downgrade, near its highest level in almost two decades. Lenders want to be paid more to lend to a government whose debts keep growing. Higher yields then raise the interest bill further. It is a cycle that is hard to break without spending cuts, tax rises or inflation. History suggests governments tend to prefer the last.

The dollar has also been weak this year, falling against most major currencies, the pound included. Gold moved the other way. After a dip in mid-May it recovered through the second half of the month. As June began it rose again, back within a few percent of its April record high.

Reserve status is earned, not owned

The dollar sits at the centre of the world's financial system. Central banks hold it in reserve. Oil and much of global trade are priced in it. That status rests on one thing above all: confidence that the United States will always pay its debts in money that holds its value.

A downgrade does not end that status overnight. Nothing replaces the dollar quickly. US markets remain the deepest in the world. But reserve currencies have lost their place before. Sterling held the role for a century and then gave it up over a few decades, as Britain's debts grew and the pound was devalued time after time.

Older readers will remember one of those moments. On Saturday 18 November 1967 the pound was devalued by 14%, from $2.80 to $2.40. The next day Harold Wilson told the country on television that "the pound here in Britain, in your pocket or purse or in your bank" was worth no less than before. It was a promise few believed. The pound bought less abroad and imported goods cost more at home, which is how a fall in a currency reaches every household.

The reserve asset with no issuer

Every currency and every government bond is a debt owed by someone. It is only as good as the finances of the issuer. Gold is different. It is not a liability of any government. It cannot be downgraded, defaulted on or printed.

That is why central banks have been buying it in record amounts. They bought more than 1,000 tonnes in each of the last three years. Many of those buyers are diversifying away from dollars precisely because they can see the same numbers Moody's sees.

Why it matters in Britain

Britain faces the same arithmetic. As we wrote in January in New Year, Old Problem, UK government debt is close to the size of the whole economy. Interest costs take a growing share of tax revenue. The Bank of England cut Bank Rate to 4.25% on 8 May, which eases the pressure on borrowers and lowers the return on cash.

The latest official figures make the point. Public sector net debt stood at 95.5% of national output at the end of April, a level last seen in the early 1960s. The government borrowed £20.2 billion in April alone. Central government spent £9.0 billion on debt interest in that single month. For the year to March 2025, borrowing came to £148.3 billion, £11.0 billion more than the official forecast.

When governments on both sides of the Atlantic depend on borrowing, the temptation to let inflation reduce the real value of their debts grows. Savers holding only cash carry that cost, because each pound buys a little less each year.

Gold has served as a store of value through every era of public debt. UK legal tender gold coins such as the Britannia and the Sovereign add a further benefit: gains on them are exempt from Capital Gains Tax for UK residents. Gold's price does move, sometimes sharply, so it suits money that can be left alone for years rather than months.

A rating is an opinion. Gold needs no rating at all.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.