Moody's US Credit Rating Downgrade: Causes, Impact, and Investment Strategies
Key Summary
- 🔴Credit Rating Downgrade: On May 16, 2025, Moody's downgraded the US credit rating from its highest grade Aaa to Aa1
- 📊Historical Significance: For the first time since 1917, the US has lost its top rating from all major credit rating agencies (S&P, Fitch, Moody's)
- ⚠️Main Causes: Persistent national debt increase ($36 trillion), expanding fiscal deficit, and political division preventing structural reforms
- 💡Investment Strategy: Short-term market volatility is expected, but from a long-term investment perspective, a calm approach is needed rather than excessive fear
1. Significance of Moody's Credit Rating Downgrade
On May 16, 2025, Moody's downgraded the United States' credit rating from the highest grade Aaa to the one-notch lower Aa1. This is a significant event because Moody's was the last major credit rating agency that had maintained the highest credit rating for the US since 1917.
History of US Credit Rating Downgrades
| Rating Agency | Downgrade Date | Rating Change | Main Cause |
|---|---|---|---|
| S&P | August 2011 | AAA → AA+ | Debt ceiling crisis, political deadlock |
| Fitch | August 2023 | AAA → AA+ | Fiscal deterioration, governance weakness |
| Moody's | May 2025 | Aaa → Aa1 | Debt increase, persistent fiscal deficit |
With Moody's decision, the US has now lost its top rating from all major credit rating agencies, following S&P (2011) and Fitch (2023). However, Moody's changed the US credit rating outlook from 'negative' to 'stable,' suggesting that the possibility of further downgrades is low for the time being.
2. Main Causes of the Credit Rating Downgrade
Moody's cited the following factors for this rating downgrade:
Debt Increase
US national debt has exceeded $36 trillion, with the debt-to-GDP ratio continuously rising
Expanding Fiscal Deficit
Expected to grow from 6.4% of GDP in 2024 to 9% by 2035, with interest costs also continuously increasing
Political Division
Failure to reach bipartisan consensus, preventing structural reforms for fiscal soundness
Moody's specifically projected that the US federal debt burden will increase from the current 98% of GDP to 134% by 2035. Moreover, they forecasted that extending President Trump's 2017 Tax Cuts and Jobs Act (TCJA) would add approximately $4 trillion to the deficit over the next decade.
US National Debt Trend (2000-2025)
** Source: US Treasury Department, Moody's forecast data **
Upcoming Important Events
It's important to monitor key events that could affect the US credit rating:
- Tax Cut Extension: The potential extension of President Trump's 2017 Tax Cuts and Jobs Act (TCJA) could negatively impact fiscal conditions.
- Government Debt Ceiling Negotiations: Future debt ceiling negotiations and any agreements on fiscal soundness improvement are crucial.
- Federal Reserve Policy: Interest rate policies and maintaining central bank independence are important variables.
- Trade Policy: Tariffs and other trade policies that affect economic growth and fiscal conditions are significant.
3. Market Reactions to Previous Credit Rating Downgrades
We can predict the impact of Moody's decision on markets by examining the two previous credit rating downgrade cases.
Market Reactions to Previous Credit Rating Downgrades
** Source: Bloomberg, Trading Economics data **
S&P Downgrade Case in 2011
The S&P downgrade of the US credit rating in August 2011 had a significant impact on markets:
- Stock Market: The S&P 500 index fell by up to 19.5% but recovered most of the loss within 3 months
- Bond Market: US Treasuries actually strengthened due to safe-haven demand
- Korean Market: KOSPI fell by about 7% but began to recover within a month
S&P 500 & KOSPI Trends Before and After the 2011 S&P Downgrade
** Source: Bloomberg, Korea Exchange (KRX) data **
Fitch Downgrade Case in 2023
Fitch's credit rating downgrade in August 2023 had less impact on markets than the 2011 case:
- Stock Market: Short-term decline of 1-2% followed by quick recovery
- Bond Market: US 10-year Treasury yield slightly increased before stabilizing
- Korean Market: KOSPI fell by 1.9% on the first day but recovered within a week
🔍 Expert Analysis
"The 2011 S&P credit rating downgrade was due to political risk. The 2023 Fitch downgrade was due to fiscal risk, and this Moody's downgrade points to even more serious fiscal problems. While markets tend to become less sensitive to these credit rating downgrades over time, this could actually be a signal that the US debt problem remains unresolved."
- Park Kwang-nam, Analyst, Mirae Asset Securities
Impact on the Korean Market
Historically, US credit rating downgrades have created short-term shocks in the Korean market, but they typically recover quickly.
| Category | 2011 S&P Downgrade | 2023 Fitch Downgrade | 2025 Moody's Downgrade (Expected) |
|---|---|---|---|
| KOSPI Short-term Reaction | -7.2% | -1.9% | -1~2% Expected |
| Recovery Period | About 4 weeks | About 1 week | Within 1 week Expected |
| KRW/USD Exchange Rate | +3.5% | +1.1% | +0.5~1% Expected |
| Foreign Net Selling | About 4.2 trillion won | About 1.5 trillion won | Around 1 trillion won Expected |
Korean financial market experts project that the impact of Moody's credit rating downgrade on the Korean market will be more limited than in the past:
"Today's Korean financial markets are much more resilient than they were 12 years ago and will not be significantly shaken by the US credit rating downgrade." - Seo Jung-hoon, Hana Bank Researcher
4. Investment Response Strategies
Here are wise investment strategies in response to this credit rating downgrade:
Short-term Response Strategies
- Temporarily increase cash positions to prepare for market volatility
- Avoid excessive leverage investing
- Slightly increase allocation to safe assets like gold and US Treasuries
- Consider defensive stocks (utilities, consumer staples)
- Review hedging strategies for KRW/USD exchange rate fluctuations
Long-term Response Strategies
- Use excessive fear reactions as buying opportunities
- Maintain diversified investments focused on quality stocks
- Look for differentiation opportunities between US and Korean markets
- Balance allocation between traditional safe assets and digital assets
- Pay attention to changes in fiscal and monetary policies
Asset-specific Investment Strategies
Investment Strategies and Expected Impact by Asset Type
| Asset Type | Expected Impact | Investment Strategy |
|---|---|---|
| US Stocks | Short-term Volatility ↑→Limited Long-term Impact | Look for buying opportunities in quality growth stocks during short-term corrections |
| Korean Stocks | Short-term Foreign Outflows→Quick Recovery Expected | Balanced allocation between export stocks and defensive stocks |
| US Treasuries | Slight Yield Increase→Safe-haven Status Maintained | Prefer short to medium-term bonds over long-term bonds |
| Gold | Safe-haven Demand ↑ | Maintain 5-10% portfolio allocation for diversification |
| US Dollar | Short-term Weakness→Reserve Currency Status Maintained | Adjust excessive dollar positions, exchange only for essential expenses |
Three Important Investment Guidelines
Turn Volatility into Opportunity
Markets have always recovered after credit rating downgrades. Excessive fear can present good buying opportunities.
Maintain Diversification
Don't concentrate on single assets; maintain appropriate diversification strategies across regions and asset classes.
Maintain a Long-term Perspective
Rather than overreacting to short-term fluctuations, focus on long-term investment plans and pay attention to policy changes.
5. Conclusion
While Moody's US credit rating downgrade is a significant event, historical cases suggest that its long-term impact on markets will likely be limited. Investors should maintain a long-term perspective with diversified investment strategies rather than overreacting to short-term volatility.
The US fiscal problem is a structural issue that cannot be resolved overnight, and this credit rating downgrade reflects that reality. Therefore, investors should continuously monitor the fundamentals of the US and global economies while responding sensitively to policy changes and market trends.
Volatility can be an opportunity rather than a cause for fear. By establishing investment strategies based on thorough analysis and calm judgment, investors can navigate this situation wisely.
※ Investment Disclaimer
This article is written for investment reference purposes and is not recommending any specific investment method. Investments should be made based on individual judgment and responsibility, and the author is not responsible for investment results based on this article. It is recommended that you make investment decisions that match your investment profile and goals.