In baseball, a game so emblematic of American culture, three strikes—meaning errors or missteps—mean you’re out. Unfortunately, that’s pretty much what’s happened to the US’s once-spotless “AAA” credit rating.
The first strike came on August 5, 2011, when S&P Global downgraded the US from “AAA” to “AA+”, stating concerns over the diminishing effectiveness and stability of policy-making.
Strike two occurred on August 1, 2023, as Fitch pointed out the worsening governance standards over two decades and reiterated that the debt resolution measures warranted a downgrade to “AA.”
Then came strike three on May 16, 2025. Moody’s, which had upheld the highest credit rating for the US since 1917, warned of a potential jump in debt levels to 9% by 2035, leading to a downgrade to “AA1.”
Just to clarify, all three ratings are still considered quite strong, and Moody’s holds out hope that the US can regain its “AAA” rating soon through improved revenue or spending cuts.
Why did this happen?
Well, the US currently faces a staggering debt of $36 trillion, which has been on the rise each year since 2002, piling on about $1 trillion every three months, according to Treasury data.
The inability to control this debt—fueled by chronic budget deficits—has become alarming.
Essentially, the US owes a significant amount, and annual borrowing has accelerated the situation, leading to an astronomical burden, inclusive of interest.
The White House’s Stance on Moody’s
The White House has, unsurprisingly, contested these ratings, labeling them as politically motivated and criticizing Moody’s chief economist, Mark Zandy.
According to Trump spokesperson Stephen Chong, “No one takes his ‘analysis’ seriously. He proves wrong time and again.” Trump had previously suggested that his economic policies would bolster manufacturing jobs and spur growth through tax cuts and deregulation.
“Economic Management” 101
Almost every nation operates at a fiscal deficit, which means they spend more than they earn, necessitating borrowing and creating debt.
However, US debt levels are particularly alarming. As of 2025, only a handful of countries’ debts surpass their production, exceeding 100% of GDP.
In April 2025, the IMF reported the US had the eighth highest public debt at 122.5%. Among the countries with higher debt levels, one is a low-income African nation, and two are experiencing severe economic crises.
While borrowing during a crisis is understandable—like India’s during COVID—the US borrowed significantly less during its wars and for tax cuts.
This results in a situation where the US balances the budget deficit through borrowing, amounting to an estimated $1 trillion from Japanese, $779 billion from UK, and $765 billion from Chinese investors. That’s around 25% of the total debt.
Interestingly, countries holding this debt, including Canada with $426 billion, are now looking to benefit by lifting the heavy tariffs imposed by Trump.
As of March 2025, India holds US debt to the tune of $240 billion, based on Treasury data.
Also, about $15.2 trillion, or 42% of the US debt, is internally held.
India’s Debt Levels
For India, foreign debt stands at around $718 billion, according to the latest Ministry of Finance data.
India’s overall debt-to-GDP ratio is approximately 80%, ranking it 31st globally. The goal is to reduce this by 1 percentage point annually until it reaches 50%.
Last year, the Reserve Bank suggested that “strategic restructuring of government spending” could help bring this ratio down to 73.4% by 2030.
As in the US, much of India’s debt is internally held, with individuals and organizations owning the majority. A smaller portion is possessed by international financial institutions like the World Bank.
Importantly, only 16% of India’s debt is held by foreign nations, the largest share being from Japan, while a couple of others include Russia and Germany.
India’s fiscal deficit is also considerably constrained; the fiscal year 2025 figure was announced at 4.8% by Finance Minister Nirmala Sitharaman.
Don’t Forget to Pay Off Your Debts
The key challenge with “debt” lies in generating enough income to run the country and pay interest on what’s owed.
A metric to gauge this is the debt-to-household GDP ratio. This was around 73% in the US by the end of 2024, while India was at about 40% during the same timeframe.
In dollars, that translates into roughly $18 trillion for the US and around $700 billion for India.
The rise in US household debt—averaging about $105,000 per person largely due to credit card bills and mortgages—adds to the reasons behind Moody’s alongside S&P and Fitch deciding to downgrade.
Ironically, such downgrades could worsen the financial situation for Americans, as higher loan rates often link to lower credit ratings.
Consider your credit card statements: if you keep running up charges without adequately managing your debt, those interest rates will climb, increasing future costs.
That “One Big, Beautiful Bill”
This all brings us back to Trump’s assertions about lowering operating costs, reducing government staff, “saving money,” and enhancing domestic production via tariffs on imports.
These so-called “cost-cutting” measures, which draw in high-profile business figures like Elon Musk, may only yield marginal savings, covering less than 1% of the total budget by cutting foreign aid and consumer protections.
Nevertheless, Trump claimed this would alleviate about $1 trillion from the budget.
In reality, CBS News reported in April that the Trump administration spent $200 billion during its first 100 days.
Now, Trump’s “one big, beautiful bill,” which includes extending tax cuts from his first term, is anticipated to add nearly $4 trillion in debt over the next ten years.
This initiative will significantly cut healthcare for 71 million low-income Americans.
Has Debt Default Been Avoided?
Does this all mean that the US could default on its debt, akin to Sri Lanka, Russia, and Ghana in 2022, or Greece in 2015?
The US has often managed to sidestep this pitfall.
Since 1960, the US has raised its borrowing limit—legally permissible debt—78 times to avert default. The current debt of $36 trillion has again breached that limit.
If the US government fails to lift its borrowing ceiling for the 79th time, it could then face a default scenario, triggering another global economic crisis.
What Does This Mean?
In the immediate term, the implications might not be severe. For instance, Indian investors owning US bonds likely won’t feel substantial impacts from long-term financial products issued by the government.
If anything, it may actually benefit them, as lenders might demand higher interest rates, given that a downgrade could make US borrowing costlier.
The effects on the currency remain ambiguous. A weaker dollar might bode well for the rupee, and uncertainty around the American currency could lead investors to look for opportunities abroad.
Nevertheless, investors often weigh credit ratings to gauge the risk profile of entities when raising funds in capital markets. Typically, a lower rating translates to higher financing costs.
