Why was the US national debt downgraded? What impact does it have on Taiwan, which holds a large amount of US debt? Research institutions and explanations.

Moody's, one of the three major credit rating agencies in the United States, announced after the close of the New York market on the 16th that it has downgraded the U.S. credit rating from the top Aaa to Aa1, and revised the rating outlook from negative to stable. This is primarily due to the ongoing expansion of the fiscal deficit and the failure of the House Republicans to pass a large-scale tax cut and spending reduction plan.

The main reason for the downgrade: Continuous expansion of the fiscal deficit.

Among the three major rating agencies, Standard & Poor's downgraded the federal debt in 2011, and Fitch Ratings followed suit in 2023. After the news of Moody's downgrade was announced, the prices of U.S. Treasury bonds fell, and the yield on the 10-year U.S. Treasury surged to 4.49%.

According to reports, Moody's stated in a statement: "We expect the federal deficit to widen, reaching nearly 9% by 2035, up from 6.4% in 2024, primarily due to increased debt interest payments, rising welfare spending, and relatively low income generation." Continuing the tax cuts from Trump's 2017 policy, this is a priority for the Republican-controlled Congress, which will add $4 trillion to the federal primary deficit ( excluding interest payments ) over the next decade.

Reports indicate that the current situation is that Republicans refuse to raise taxes, while Democrats are unwilling to cut spending. On Friday, House Republicans failed to pass a budget committee proposal that included large-scale tax cuts and spending reductions. A small group of far-right Republican legislators insisted on demanding greater cuts to Medicaid and President Biden's green energy tax credits, and opposed the proposal together with all Democrats.

Research Institution: Downgrade has no impact

What impact will the downgrade of U.S. Treasuries have on the market? Especially for Taiwan, which holds a large amount of U.S. Treasuries. Jim Bianco, founder of Bianco Research, pointed out on Twitter that in August 2011, Standard & Poor's was the first to downgrade the U.S. credit rating from AAA to AA+. This immediately caused chaos. The reason for the chaos at that time was that many derivative contracts, loan agreements, and investment instructions prohibited the use of any securities that were not AAA rated. There were concerns that government bonds would no longer be eligible collateral, which could lead to some technical defaults.

After that, these contracts were rewritten as government securities, excluding the qualification criteria for credit ratings. This is why in August 2023, when Fitch downgraded the U.S. rating to AA+, the U.S. became a rated AA+ country with a split rating. This downgrade had almost no effect on the bond market. Technically, the overall credit rating of the United States did not change, as it was previously a split-rated AA+, and now it is consistently rated AA+. He specifically emphasized that no one would take action on Monday as a result.

Why did the U.S. national debt receive a downgrade? What impact does it have on Taiwan, which holds a large amount of U.S. debt? This was first reported by the research institution and clarified in Chain News ABMedia.