As US Credit Rating Fall, Bankruptcy Options Grow

The United States' credit rating has been downgraded due to escalating concerns over its fiscal health. On May 16, 2025, Moody’s lowered the U.S. sovereign credit rating from AAA to AA1, marking the first time since 1917 that the nation lacks a top-tier rating from all three major credit agencies .The U.S. credit rating has fallen due to concerns primarily related to the country's increasing debt burden and fiscal management. As of today, May 19, 2025, the U.S. no longer holds a perfect "AAA" rating from all three major credit rating agencies. The Global Head of the Restructuring and Special Solutions Group at PJT Partners (Steve Zelin,) joined Wall Street Beat on Bloomberg Open Interest to talk about his concerns of potential bankruptcies.

When credit ratings goes down, the expectation is that the cost of borrowing will increase among consumers. This could result in creditors demanding higher interest rates while Americans at the same time are already struggling to keep up with high interest payments. More specifically, higher rates on mortgages, credit cards, and personal loans will be contributing factors in an environment of economic uncertainty that "could" lead to future consumer bankruptcies. 

Reasons for the Downgrade

1. Rising National Debt and Interest Costs: The U.S. national debt has surpassed $36 trillion, with interest payments consuming an increasing portion of the federal budget. Moody’s highlighted that these debt and interest payment ratios are significantly higher than those of similarly rated sovereigns.
2. Persistent Fiscal Deficits: Successive administrations and Congresses have failed to implement measures to reverse the trend of large annual fiscal deficits. Moody’s expressed skepticism that current fiscal proposals would lead to material multi-year reductions in mandatory spending and deficits.
3. Political Dysfunction: Ongoing political gridlock in Washington, D.C., has hindered the government's ability to address fiscal challenges effectively. This dysfunction has contributed to the downgrade, as it raises concerns about the sustainability of U.S. fiscal policies .