US sovereign credit downgrades global markets need to face the risk of gray rhino

**Source**: CBN (China Business Network)  

The U.S. government debt has become a "gray rhino," choking global financial markets.  

On the 16th, international credit rating agency Moody’s announced it was downgrading the U.S. sovereign credit rating from Aaa to Aa1, while adjusting the rating outlook from "negative" to "stable." With this, all three major international credit rating agencies have now removed the U.S. sovereign credit rating from the highest tier, warning that U.S. Treasury bonds may no longer be treated as risk-free assets.  

The previous two downgrades of U.S. sovereign credit ratings occurred in August 2011 and August 2023, when S&P Global Ratings and Fitch Ratings downgraded the U.S. from AAA to AA+, both triggering intense reactions in global financial markets. Since Moody’s announcement came after the close of U.S. stock markets, there was limited immediate market reaction, but how U.S. financial markets respond on the 19th remains highly uncertain for investors.  

All three downgrades of the U.S. sovereign credit rating occurred not long after the country hit its debt ceiling "X date," directly linked to the unsustainability of U.S. government debt. In its announcement, Moody’s noted that the downgrade reflects the continuous rise in the ratio of U.S. government debt to interest payments over the past decade, with the deficit expected to expand from 6.4% of GDP in 2024 to 9% by 2035. It also predicts that by 2035, mandatory spending including interest payments will account for 78% of total U.S. government expenditures, up from 73% in 2024.  

Unlike the impact of the first U.S. sovereign credit downgrade in August 2011—when eligible collateral requirements had already been relaxed to below 3A—the current downgrade is unlikely to trigger instantaneous market panic as in 2011, but the risk exposure it creates for markets is very real.  

Regarding the unsustainability of U.S. deficit financing, unlike Democratic administrations that tend to balance deficits by taxing the wealthy, the Trump administration has pursued strategies since taking office to reduce economic and social operating costs, such as increasing tariffs abroad, cutting taxes at home, reducing fiscal spending through DOGE (likely a typo or abbreviation; context unclear), deregulation, and innovative financing methods like "Trump Gold Cards" and taxing overseas remittances by non-citizens—all aimed to varying degrees at addressing sustainable fiscal budgeting and deficit economics.  

Successive U.S. governments have prioritized the fiscal deficit issue due to the extreme importance of U.S. Treasury bonds in both domestic and global political-economic spheres. If the sustainability of the U.S. fiscal deficit cannot be systematically resolved, losing the highest sovereign credit rating would make it difficult for Treasury bonds to be seen as completely safe assets in financial practice. This could rapidly lift U.S. Treasury yield curves, raise risk premiums for risky assets in global financial markets, and increase operational and financing costs for the global trading system—requiring markets to absorb additional capital to hedge the exposure risks from steepening Treasury yields.  

This would harm global economic growth, exacerbate dollar liquidity costs for emerging economies, and increase their risk pressures. After all, if the U.S. sovereign credit rating is completely excluded from the highest tier, even if the Federal Reserve cuts rates, U.S. Treasury yield curves may not adjust downward accordingly. Instead, compared to 3A corporate bonds, markets would need to price in risk premiums for Treasury bonds matching their credit rating.  

Of course, the biggest market concern is that if U.S. Treasury bonds can no longer be seen as risk-free assets, the "anchor of stability" for global financial markets would lose its steadiness, increasing volatility in global financial markets and even the international trading system. For this reason, Moody’s downgrade is not just a notice of critical illness for U.S. fiscal deficits but also a warning to Congress’s two parties to bridge their divides, potentially triggering new political games in the U.S.  

Clearly, for the U.S. to maintain the sustainability of deficit financing and restore its sovereign credit to the highest tier, it needs cross-party consensus, government institutional restructuring, and fiscal structural reform. If U.S.-style tax cuts, deregulation, and other measures make substantive progress, the tax-bond substitution effect could be breakthrough: financing through bonds would create intertemporal deferred tax liabilities across the economy, while immediate savings from tax cuts—under deregulation—could become capital for private-sector wealth creation, expanding future tax bases to mitigate current deficit risks.  

"Adversity brings no regret when one has weathered crises." Like a gray rhino, U.S. deficit financing has long tested investors and imposed predictable risks on global financial markets ("a hundred days of misfortune, ninety crises"). Rating agencies’ downgrades of U.S. sovereign credit serve as a warning for the U.S. government to assume its responsibilities as a major power and steer deficit financing onto a sustainable path. They also remind investors holding large dollar asset positions to conduct risk stress tests, optimize risk asset allocations, balance exposure, and confront the sovereign credit downgrade by pricing assets based on relative risk values.  

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