It’s not America’s year.
Amid a damaging trade war, a wobbly stock market, and a global sell-off of US assets, there’s a new warning that gargantuan debt levels and political dysfunction could trigger another downgrade in the nation’s once-bulletproof credit rating.
In an April 14 report, S&P Global Ratings hinted that it could lower the US credit rating, currently at AA+, by another notch if any of a number of things happen to make the US’s fiscal situation worse. And it’s a good bet some of those things will happen.
“The outcome of the US government’s budget process and policy negotiations over the coming months will help determine policies that inform our view of US sovereign creditworthiness,” S&P said in the oblique language typical of fiscal credit analyses. “These discussions could affect our view of the US’s fiscal profile.”
S&P was the first agency to cut the US credit rating, all the way back in 2011, after a congressional standoff over raising the nation’s borrowing limit almost left the Treasury Department unable to pay its bills. At the time, the total national debt was about $15 trillion, and the portion held by the public amounted to 66% of GDP.
The national debt is now $36 trillion, and the portion held by the public is about 100% of GDP. The ever-worsening debt outlook led Fitch to downgrade the US credit rating from AAA to AA+. The same year, Moody’s changed its outlook for US creditworthiness from stable to negative.
In March, Moody’s warned about the ballooning cost of financing the government’s debt due to rising interest rates. “The US fiscal strength is on course for a continued multiyear decline,” the agency said.
S&P has several concerns relating to the policies President Trump and his fellow Republicans are pushing in Congress. In addition to the sheer size of the government’s debt, the firm cited a budgeting gimmick congressional Republicans are considering as part of the big tax cut bill that’s underway on Capitol Hill. The gimmick, known as the “current policy baseline” method of accounting, would massively understate the amount that tax cuts would add to the debt and even allow for deeper tax cuts financed by borrowing than Congress could pull off without the trick.
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“The adoption of an unprecedented accounting approach in the budget resolution and reconciliation process reinforces the lack of clarity about the magnitude of future deficits,” S&P said. That sounds like a strong hint to the legislators: Cook the books, and your rating drops.
Another message from S&P to Congress involves the debt ceiling, which the legislators will have to raise at some point this summer. “We expect Congress will act in a timely manner with some form of legislation to raise or suspend the debt ceiling before the Treasury runs out of space,” S&P said encouragingly. Translation: A repeat of the 2011 standoff and renewed threats of default would be a really bad idea.
Other concerns include Trump’s tariffs, which most forecasters expect to raise costs and prices, slow growth, and push unemployment up. Some think Trump’s protectionism could go as far as causing a recession. Downturns are always bad for federal budgets because corporate and individual tax revenue declines, while Congress typically passes fiscal stimulus to speed a recovery. Historically, the biggest budget deficits occur during recessions.
S&P also cited uncertainty relating to Trump’s plan to deport thousands of migrants, which will remove a lot of workers and lower growth in an economy already suffering some labor shortages. And the firm noted that it “already incorporates a higher level of political polarization [in the US] compared with other similarly rated peers and the difficulties in garnering bipartisan cooperation to strengthen US fiscal dynamics.”
When S&P downgraded the US rating in 2011, it triggered a major stock-market sell-off and raised worries about a debt crisis that could make it costlier for the US government to borrow. But no crisis ever materialized. The Treasury continued to issue debt at some of the world’s lowest interest rates, which meant investors still considered the United States highly creditworthy and saw no unusual risk buying US debt.
That may finally be shifting. During the last couple of weeks, Trump’s drastic tariffs on hundreds of billions of dollars worth of imports have started to rewire global investing flows in ways that suggest a loss of faith in the United States as an economic haven. Investors have been selling American stocks and US Treasury securities at the same time, a highly unusual correlation given that Treasurys are usually the No. 1 safe asset investors flock to when they flee risky assets such as stocks.
The “Sell America” trade could gain momentum if another S&P downgrade really is coming, especially if paired with the downgrade Moody’s may have been telegraphing in March. The US economy is strong, but it’s not impervious to the endless hackery of politicians. A tough year could still get worse.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
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