Chuck Jaffe: About that U.S. credit downgrade: Fitch is on to something


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Political leaders will complain when the inevitable happens, but they seem unwilling to do anything to stop it.

Here’s one thing we know for sure about the United States’ long-term credit rating: It won’t get any better from here.

If America was a consumer looking at a credit score that had just fallen from “excellent” to “very good,” it would do what consumers do, clean up some bad habits, pay off more/all of its revolving debt and wait for time to heal the wounds and restore the top score.

That’s not happening with the U.S. government. When Fitch Ratings downgraded U.S. government debt from AAA to AA+, it was sending a message that, sadly, will fall on deaf ears in Washington.

The downgrade on Aug. 1 is the second ever for the United States. Standard & Poor’s cut its rating on U.S. debt in 2011. S&P reportedly has not reversed course on that rating cut because Congress still won’t cooperate to raise the debt ceiling, keep the government open and avoid default.

Fitch pegged its downgrade to the U.S. government’s “complex budgeting process,” “repeated debt-limit political standoffs and last-minute resolutions,” and “several economic shocks as well as tax cuts and new spending initiatives.” In short, no credit-rating agency wants to see every political deal taken to last-minute, edge-of-disaster brinkmanship.

While experts questioned the timing of Fitch’s move — it came out of the blue, rather than right after the most recent debt-ceiling crisis was resolved at the end of May — Fitch was pointing out the obvious, that the U.S. is on a poor fiscal path.

I suspect the timing reflects the U.S. Treasury’s recent announcement that its borrowings through September will be closer to $1 trillion rather than the $730 billion it had forecast. That’s a lot of extra supply for the bond market to absorb at a time when House Republicans could not pass 11 of 12 necessary appropriations bills before adjourning for their August recess, and when debt-ceiling issues were “fixed” with Band-Aid measures.

Credit scores are supposed to uncover those kinds of flaws in individuals before lenders make a mistake; so are credit ratings on corporate and government debt. Fitch’s lower rating in no way suggests that the U.S. is close to being a default risk, but it clearly hints that the sour smell coming from Washington is trouble brewing.

The change does not impact the way individuals will invest. People who want to own Treasury bonds and mutual funds mandated to buy U.S. government bonds are not going to substitute national paper from Germany, Australia or Singapore just because those nations still get top marks from all three major ratings agencies. Likewise, the foreign nations who buy U.S. debt don’t think AA+ from Fitch translates to “Default is imminent.”

See: Here are the countries that still have Triple-A credit ratings across the board

As a result, the market’s immediate response was muted, especially compared to S&P’s cut back in 2011. But that was the first-ever cut and it occurred at a time when U.S. interest rates were near zero, which sent money flooding into gold
The Fitch downgrade saw money rush into the U.S. dollar
creating much less of a knee-jerk market impact.

“This is simply Fitch moving in line with something S&P had already done,” said George Milling Stanley, chief gold strategist for State Street Global Advisors in an interview on my Money Life with Chuck Jaffe podcast. “If Moody’s had taken the same action — or if Moody’s tomorrow decides to take the same action — that might then be somewhat more of an issue for U.S. debt and we might see more of a response [from the market and] in gold.”

Moody’s may indeed follow suit. Bond-rating agencies don’t come to wildly different conclusions; they see the same things in all the paper they examine. Discrepancies between ratings are about fine-line distinctions and back-room judgments.

I find plenty of blame to go around on both sides of the political aisle, but even a die-hard partisan blaming the other side has to see the roadblocks the country is getting stuck on — and this is the real price all of us, and the nation, ultimately pay for such divisive behavior.

“We’ve got a lot more borrowing that’s coming down the pike and a government that, at best, is finding it difficult to see eye-to-eye on how to meet these financial priorities,” said Steve Sosnick, chief market strategist at Interactive Brokers, in an interview on my show. “You’ve got some really, really divergent views — even within the Republican and Democratic caucuses, there are wildly different views on what the financial priorities should be — but I don’t think we have had before what I would call a group of nihilists who are so willing to let the government shut down or threaten to shut down just to get a point across.”

If politics keeps getting in the way of governing, the ratings agencies have no choice but to think less of U.S. debt. So the Fitch decision was bad news without much impact; worse news with much bigger impact lies ahead. Political leaders will complain when the inevitable happens, but they seem unwilling to do anything to stop it.

More: Moody’s places credit ratings of 6 major U.S. banks on review for downgrade

Also read: Bank asset quality, weaker profits spark Moody’s reviews and downgrades as it weighs potential 2024 recession

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Alexandra Williams
Alexandra Williams
Alexandra Williams is a writer and editor. Angeles. She writes about politics, art, and culture for LinkDaddy News.

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