On 3rd February 2025, President Donald Trump signed Executive Order 14199, directing the US withdrawal from select UN bodies, including the UN Human Rights Council (UNHRC) and the UN Relief and Works Agency for Palestine Refugees (UNRWA). The order also mandates a 90-day review of United Nations Educational, Scientific and Cultural Organisation (UNESCO) membership. Furthermore, a broader assessment of all international intergovernmental organisations in which the US is a member and provides funding or support is due within 180 days.
The administration justifies these actions under its “America First” policy, citing inefficiencies, perceived anti-US biases, and the need to reallocate financial contributions. However, the decision extends beyond geopolitical realignment—it introduces uncertainties that could impact credit markets, particularly the creditworthiness of multilateral development banks (MDBs) and global investor confidence.
This is classic political risk in treasury management; in this case a change in political priorities that can affect the price of financial assets or the cost of debt. However, as with all political risk, we will not know the final impact immediately, as it usually follows a period of negotiation, consultation and the passing of legislation. In this case, it is uncertain whether the US president has the executive power to withdraw from these institutions: the decisions to join MDBs were legislated by US Congress and therefore Congress will need to pass legislation to withdraw. Congress is also in charge of funding, so Congress cooperation would be necessary to alter this obligation. Of course, the President could pressure Congress into making that or other decisions related to the US’s membership, but this is likely to take time beyond the 180-day review period and there is no guarantee anything will happen.
Impact on Multilateral Development Banks' Credit Ratings
Credit rating agencies have expressed apprehension regarding the US withdrawal. Moody's cautioned that the World Bank and other top MDBs could face threats to their AAA credit ratings if the US retracts its support. The agency emphasised that a significant reduction in US commitment could have negative credit implications for these institutions.
Similarly, S&P Global highlighted the unprecedented nature of such a withdrawal, noting that the current high ratings of these institutions presume continued US backing. A US exit would necessitate a reassessment of their capital structures and could lead to negative rating actions, contingent on whether other major shareholders can compensate for the US's absence.
Fitch Ratings similarly warned that while a full US withdrawal remains unlikely, even the perception of reduced support could undermine shareholder cohesion and governance within MDBs, triggering negative rating actions. The agency noted that the impact would depend on the extent of US disengagement, with any significant shift potentially leading to affected MDBs being placed on 'Rating Watch Negative' pending further shareholder responses.
While no immediate rating changes have occurred, the potential for negative outlooks or downgrades exists should US disengagement lead to weakened capital adequacy or declining investor sentiment.
Impact on the Financial Market Environment
MDB credit ratings and creditworthiness are important. The bonds issues by these entities are used by investors to gain higher returns for the perceived near-sovereign level risk exposure and very liquid market. Furthermore, for financial institutions, MDB bonds carry a zero-risk weighting under the capital rules of many jurisdictions and count as High Quality Liquid Assets, which can be used as collateral for repo. These factors help MDBs fund at very low yields, which assists in their development and supportive missions.
Any threats to creditworthiness would have repercussions for investors and possibly financial institutions that are reliant on a AAA rating or perhaps the use under regulatory guidelines. This could create a wave of selling and push yields higher.
However, this is clearly a worst-case scenario and there would have to be a relatively significant deterioration in creditworthiness to see a substantial market impact. So far, we have not seen a significant widening in MDB bond spreads, indicating that investors are not yet pricing in an immediate deterioration in creditworthiness. However, this could change if:
Investors will want to keep an eye on these developments and can do so through a number of ways, such as:
Broader Credit Market Implications
The impact of this policy shift does not just have implications for MDBs and their bonds, but also for the wider financial markets.
Institutional and Geopolitical Risk
The US withdrawal signals a strategic shift away from multilateral engagement, which could have knock-on effects for global capital flows. MDBs play a crucial role in financing emerging markets—any weakening of these institutions could increase borrowing costs for developing economies, leading to higher global risk premiums.
Additionally, a reduced US role in MDBs may encourage rival powers, such as China, to expand influence through alternative financial institutions, such as the Asian Infrastructure Investment Bank (AIIB). This could alter global investment patterns and create uncertainty in sovereign and supranational bond markets.
Potential Impact on US Debt Markets
Foreign investors, particularly central banks that hold US Treasuries, may view US disengagement from global institutions as an indicator of greater policy unpredictability. If this sentiment builds, it could:
US sovereign credit ratings depend on institutional strength, geopolitical stability, and fiscal health. A perceived retreat from multilateral institutions could weaken governance scores, especially amid domestic instability. While immediate rating impacts may be limited, declining international cooperation or financial stability could lead to negative outlooks. Broader effects—such as heightened geopolitical risks and reduced investor confidence—may increase borrowing costs and market volatility.
While the immediate credit impact on MDBs remains limited, investors should remain attentive to changes in US capital commitments and potential shifts in investor sentiment. The evolving situation requires close monitoring, particularly in terms of credit rating agency updates and MDB bond spreads.
If you have any further queries on credit ratings, counterparties, or investment strategy, please contact Arlingclose at treasury@arlingclose.com.
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