We shouldn't say it can't happen, look, America's rating has fallen again. Last weekend, Moody's joined the bandwagon and lowered the USA's credit rating to Aa1. Thus, the USA's rating is no longer 3A (Triple-A) in any of the 3 main institutions. In other words, the child who used to get up in every lesson to explain the subject and solve the questions on the board can no longer do this.
If you recall, in 2011, the S&P rating agency first revised the USA's credit rating downward, and indicated that the reason for this was the failure to solve the debt ceiling issue, which caused the partial closure of the state, and that this could cause a serious economic deterioration. In addition, it said that Republicans and Democrats could not produce a realistic solution to the problem and that this was due to excessive partisanship.
Later, in 2023, Fitch downgraded the USA's credit rating, placing the USA on the shelf one level below the highest level. The reason for this was that the debt ceiling issue could not be resolved permanently and the political passion in the country overshadowed other economic values, and the decision suggested that the economic problems could not be solved, and this weekend Moody's also joined the bandwagon and demoted the US from the top shelf to the bottom shelf. The reason is almost the same as in 2011 and 2023; the country's debt continued to increase rapidly due to the debt ceiling limit being constantly renewed and increased in the face of the increasing domestic and foreign debt of the US, but in return, the politicians did not provide a permanent solution to the issue.
Actually, I think they have the right to do so. In recent years, public employment has continuously increased, I think people have been employed in unnecessary titles, as in some of our public institutions. While such expenses have increased in the US, the taxes and other public earnings that were supposed to cover these expenses began to be insufficient. For this reason, the treasury has been constantly borrowing to create resources.
At this point, Moody’s says in its own argument that if the parties in the political arena do not reach a solution by reaching an agreement with each other, this stubbornness and the resulting uncertainty will lead to negative results.
Indeed, the US debt has been one of the most talked about topics in the markets for the last few years. In fact, you may have participated in or overheard many conversations titled ‘What if Japan does not buy US bonds’ recently.
If you ask me, this does not pose a danger for now. Because US bonds are still accepted as the risk-free interest rate. In other words, they say they are so safe that they have no risk. This situation will continue like this for a while, there is no doubt about it. But it should not be forgotten that; while the US dollar continues to take the lion’s share in countries’ foreign exchange reserves as it used to, this rate has clearly decreased compared to 10 years ago.
Especially China’s rise in international trade should be considered very normal for counterparties to start holding Yuan in their reserves or increase their share, even in order to facilitate trade. Considering this course of events, the fact that US politicians are trying to eat each other and forgetting to do their real jobs may cause the US to lose share in many areas in the future. From this perspective, it seems that Moody's did not do much wrong by joining the bandwagon.
In the past, rating downgrades brought purchases to bonds that were considered safe havens. This time, I cannot yet confirm such a performance. In fact, stocks only priced this news on Sunday night at the Asian opening. They bought the indices in the futures market starting from the European session and the indices spent the US session flat. It seemed as if the market did not pay much attention to what was happening.
The stock market is still operating far from its fundamentals and is not pricing the risks. The market that is acting the most timidly is bonds. It is stuck between Trump and the Fed and does not know where to go. While the Trump side is exerting all kinds of pressure to lower interest rates, the Fed side is still relying only on data and the regional Fed presidents are applying their old tactics, some saying that interest rates should be lowered, some saying that interest rates should not be lowered. In other words, the ball is strangely in the middle. If you ask my opinion, especially after last week's data, we are now closer to a decrease in interest rates. I think everyone should take their positions accordingly.
