If the US government defaults on its debt for a few hours next week, it could have far-reaching consequences for the country’s future. The three major rating agencies — S&P Global Ratings, Moody’s and Fitch Ratings — play a big role in how damaging those effects could be.
Because the financial fallout from a default would be severe, the agencies expect lawmakers to reach a deal before the government runs out of money to pay its bills, which could happen as early as next month. But all three agencies have pledged to downgrade the US as a creditor if the government defaults, and may be reluctant to restore it to its previous status even if a deal is reached soon. default.
On Wednesday evening, Fitch fired its first shot across the government’s bow, putting the US rating on downgrade watch, “reflecting heightened political partisanship that could impede reaching a resolution to raise or suspend the debt ceiling.” The agency’s analysts have warned.
The U.S. has never intentionally defaulted on its debt in the modern era, but even a brief default could turn debt-ceiling brinkmanship into political drama and pose a real threat to the government’s creditworthiness, Moody’s warned.
“Our view is that the rating should reflect that permanently,” said William Foster, lead U.S. analyst at the rating agency. The agency has said that if the Treasury Department misses an interest payment, its credit rating will be downgraded by one step. The credit limit should be substantially modified or eliminated altogether.
Credit ratings, from D or C (for S&P and Moody’s scales) to AAA or Aaa for the most attractive borrower, are embedded in financial covenants around the world, sometimes dictating the quality of debt that pension funds and other investors can hold. or types of assets that may serve as collateral for secured transactions. Ratings indicate the stability of a country’s finances, with lower-rated countries tending to face higher borrowing costs.
For the United States, Mr. Foster said. “But if that rule is removed, if it is reformed to create a default scenario where it is not a major concern, then that will be an environment for re-examination of the credit profile and that could bring it back to Aaa.
S&P downgraded the U.S.’s credit rating by one step during the debt ceiling race in 2011, and eventually a deal was reached that avoided default. The agency has kept the rating at a slightly lower AA+.
“The most powerful thing about the resolution in 2011 was the political system and you had a very clear path to normalcy. And it still is,” said John Chambers, who was on the S&P board when he downgraded the government. “The current discussion confirms S&P’s decision to downgrade and leave it there.”
A similar move by Fitch or Moody’s would drop the U.S. from a small club of the world’s highest-rated lenders. (Many investors still consider the United States triple-A, as it is rated by two of the three powers.) Moody’s gives its Aaa rating to only 12 countries, and a downgrade would put the U.S. a category below the likes of Germany. , Singapore and Canada.
Even without default, the US position could suffer. Mr. Foster said passing the so-called X-date — when the government runs out of money to pay all bills that fall due by June 1, according to the Treasury — would be enough to dampen Moody’s “outlook.” The country’s rating indicates an opinion on the potential direction of the borrower’s rating, similar to the step taken by Fitch on Wednesday.
Even a temporary agreement to suspend the credit limit for a short period of time may not be enough to motivate the rating agencies. A spokesman for Fitch said a short-term deal would “only buy time” instead of raising the debt ceiling in the long term.
“Developments will be the focus of Fitch’s rating review in the coming days,” the spokesperson said.
The U.S. benefits from its central role in the global economy, as the dollar is the dominant currency in global trade and U.S. government debt is the world’s largest debt market. Doubts about its creditworthiness could scare away foreign investors and governments, the main holders of US debt, threaten the country’s ability to finance itself as favorably as in the past, and even undermine its international standing.
“That’s not good for America,” Sri Mulyani Indravati, Indonesia’s finance minister, told a recent meeting of world finance leaders.
As the debt-ceiling impasse continues, Mr. Foster refused.
“We can’t talk about our discussions with issuers, including governments, but depending on what’s happening in a particular country at a time we have regular discussions throughout the year and sometimes more frequent discussions,” said Mr. Foster said. “We always have an open channel with those governments, including the US.”