Moody's downgraded the United States' credit rating on Friday, cutting it from the top Aaa level to Aa1 due to rising government debt, delivering a sharp setback to President Donald Trump's narrative of economic strength.

The announcement came the same day Trump’s key spending bill failed a crucial vote in Congress, blocked by a group of Republican fiscal hawks.

In a statement explaining its decision, Moody’s cited “the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”

The downgrade reflects the recent surge in US borrowing costs, further amplified by the Covid-19 pandemic, and follows earlier downgrades by the two other major US credit agencies, S&P and Fitch.

“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s said.

The agency added it does not expect “material multi-year reductions in mandatory spending and deficits” under the current fiscal proposals, warning that higher deficits are likely to persist over the next decade.

“The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns,” Moody’s warned.

Despite the downgrade, Moody’s revised the outlook from negative to stable, acknowledging that the United States “retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency.”

The move could make borrowing more costly for the U.S. government, thus exacerbating the impact on public finances. The rating is still investment grade and still far from the speculative level, so this is not such bad news. However, it is a wake-up call to the growing trend of fiscal deficits.

With information from AFP