Goldman Sachs vs. Moody's. Trump and tariffs to save the “Big, beautiful bill”

Welcome to Outlook, Repubblica's newsletter that analyzes the economy, finance, and international markets. Every Wednesday we will talk about listed and unlisted companies, personalities, institutions, scandals, and investigations related to this world. If you want to write to me, my email is [email protected].

Happy reading,

Walter Galbiati, Deputy Director of Repubblica

A slap in the face for the markets , a warning to politicians on the eve of the debate on the budget law, the “ Big beautiful bill” which, in order to pass in the House, must gain the consensus of almost all 220 Republicans against the 213 Democrats.

The downgrade . The recent downgrade that the rating agency Moody's inflicted on the United States, bringing the judgment on the debt from triple A to Aa1 , can be read as a warning to those who these days must decide the fate of the United States' accounts.

No surprises for the markets . For investors, however, the change in judgment had little value, because it did not come unexpectedly, even if the yield of ten-year and thirty-year bonds had a slight jump with an increase of 10-15 basis points . The cost of the ten-year Treasury rose above 4.5% , while that of the 30-year bond rose above 5%.

No “Sell America” . There is no feeling among operators that in the short term we could witness a generalized “Sell America” on the 4.5 trillion dollars between Treasuries and Repos held in global monetary funds. And not even among those that lie in the portfolios of banks.

For three reasons . 1) Most investment mandates of investment houses and management companies do not require a triple-A rating for US Treasuries. They can therefore buy and hold them without policy concerns and enjoy the growth in yield.

2) Banks , large buyers of government bonds, will not have to reduce the presence of US bonds in their portfolios because from the point of view of risk nothing changes between triple A and Aa1 .

For the purposes of calculating risk-weighted capital , i.e. the capital that banks must have to cover the risks of their portfolio, the Bank for International Settlements in Basel has established that there is no difference between the two levels.

3) Those who have offered US securities as collateral for loans will not have to reduce their nominal value ( haircut ) or sell them to exchange them for others.

For the Depository Trust and Clearing Corporation (DTCC), the American company that provides clearing and settlement services for transactions between financial market participants, when referring to the asset class of US Treasury securities, the haircut depends on the maturity and type of security , but not on the rating .

The Fed's umbrella . If we then add to these three reasons that the Federal Reserve can always intervene by buying US government bonds in the event of uncontrolled sales, it is easy to understand why for those who operate on the markets there is no danger on US Treasuries which, on the contrary, are liquid and today offer an even higher yield.

The warning to politics . The change in Moody's rating has more of a media value and sounds like a warning to politics, because it came a few days before Trump's speech to Congress that started the debate on the budget law .

The US accounts. The United States is running a deficit of 2 trillion dollars a year and is sitting on a mountain of debt equal to 36 trillion , over 120% of GDP . And of these 28.8 billion (100% of GDP) are in the hands of the public.

The Drift . Only ten years ago , the debt was 12.6 trillion , a third of the current value. The interests to maintain it eat up 14% of all US spending , the second item behind social spending (22%), ahead of Defense (13%), Medicare (13%) and Health (13%).

Big beautiful tax bill . A scenario that is far from comfortable, to which is added Trump's new bill, called " Big beautiful bill ", which aims, among other things, to extend the tax cuts that the president had introduced during his first term in 2017 with the Tax Cuts and Jobs Act (TCJA) and which expire this year.

The steep bill . According to calculations by the Congressional Budget Office and the Joint Committee on Taxation , extending the cuts through 2028 alone will cost $4 trillion, to which an additional $800 billion in tax cuts must be added.

The patch . In the White House's plans, these revenue losses should be partly offset by spending cuts and limits on green subsidies totaling 2 trillion, and by economic growth that these incentives should foster.

Moody's Cut: Certain Expenditures, Uncertain Incomes . The maneuver as it was presented did not convince the rating agency Moody's, which in justifying its choice cited the fiscal policies that, while on the one hand confirm the tax cuts, cannot certainly guarantee that spending will definitely be reduced .

Black on white . “We do not believe,” wrote Moody’s analysts, “that the current budget proposals under consideration will lead to significant reductions in mandatory spending and multi-year deficits . We expect higher deficits over the next decade due to increased social spending, while government revenues will remain largely unchanged .”

Worse accounts . The result will be an increase in the deficit that Moody's estimates at 9% at the end of 2035 , and consequently also the debt.

The world is beautiful because it is diverse . Yet not everyone thinks so. The US investment bank, Goldman Sachs , estimates that the tax cuts will be cancelled out by revenues linked to duties , which will however have a negative effect on growth, despite the boost from the incentives provided for in the budget.

Goldman Sachs vs. Moody’s . According to Goldman Sachs , the Big Beautiful Bill will increase the deficit in the coming years compared to current policy by about 0.4% of GDP , but it will be more than offset by tariff revenues.

As much as 400 billion in revenue . Imports in 2024 were equal to 11% of GDP: "Assuming - writes Goldman Sachs - that they decline roughly proportionately to the 13 percentage point increase in duties, tariffs should guarantee an increase of about 1.25% of GDP , or about 400 billion dollars in fiscal year 2026. "

Deficit and debt in line with today . In light of these accounts and also assuming that the tax cuts planned until 2028 will be maintained throughout the decade, Goldman Sachs estimates that, thanks to the additional revenue from duties, the deficit will not increase as Moody's predicts up to 9% , but will remain below 7% . And so will the debt, which in relation to GDP, will remain in line with current levels.

Tariffs will save the budget . In short, according to the US investment bank, tariffs will save the US budget from collapse , provided they do not impact growth to the point of transforming it into a recession .