Fitch Ratings – Washington occasionally brings up the debate of whether to raise the debt ceiling or default on US debts.
On Monday, Fitch Ratings said that despite avoiding a default for now, the nature of political showdowns could get America’s credit rating to be downgraded.
James McCormack, the global head of sovereign ratings at Fitch Ratings, said:
“We are more concerned this time around.”
Moody’s and Fitch Ratings both give the United States a perfect credit rating, but the evaluation is not based on the country’s fundamental finances.
They already look complex, and the credit ratings were at the core of the unprecedented credit ratings downgrade by S&P Global Ratings in 2011.
Since then, the country’s debt and interest costs have worsened.
The AAA rating is based on the United States’ preeminent status in the financial world, not the fundamentals.
The US dollar is regarded as the global reserve currency.
Additionally, US Treasuries are used as risk-free assets for investors.
As a result, the two characters gave the United States an unparalleled financial power.
However, McCormack warns that repeated events like the ongoing debate of raising the debt ceiling will reduce the two characteristics.
The debt ceiling problem
As the United States inches closer to the reality of running out of money, investors are forced to entertain the possibility of a debt default.
“When investors have to think about that, that’s not what you’re looking for in a risk-free asset, right?” said McCormack.
He also noted that people might want to reassess if Treasuries are as risk-free as they believe.
According to a late February analysis by the Bipartisan Policy Center, the country will likely start defaulting on obligations over the summer or in early fall if Congress doesn’t address the debt ceiling beforehand.
James McCormack was asked if Fitch Ratings could downgrade in the United States even if they can avoid a default for now.
He said that it would depend on how global financial markets react and elaborated:
“If the market reaction is to call into question the role of the dollar in the future as the world’s reserve currency and the Treasury market as the world’s risk-free asset, then absolutely we could.”
Furthermore, McCormack said that Fitch Ratings will be closely monitoring any foreign central banks backing away from the US dollar or US Treasuries.
Read also: Stock market ends February with losses
The danger of politics in the debate
With Washington debating on how to address the debt ceiling, stakes have grown higher.
In late January, Goldman Sachs said that a debt ceiling crisis could open the doors to a recession.
Actual defaults would also plunge Wall Street and Main Street into chaos, delaying payments to the following:
- Social Security recipients
- Military service members
However, Fitch Ratings, among other observers, are expecting Washington to pull together before the nightmare scenario comes to fruition.
“We are of the view that this time will not be different and this will be resolved before the X-date,” said McCormack.
As a result, Fitch Rates hasn’t listed the United States on watch for a downgrade yet.
Regardless, James McCormack warned that the debt ceiling standoff could be more dangerous due to the Washington situation.
“Political divisions look more intense,” he noted. “The US is more polarized.”
The United States is dealing with several issues on top of the debt, including an increase in borrowing cost.
The Federal Reserve’s attempts to curb inflation has made it more expensive to finance a mountain of debt.
According to the Congressional Budget Office’s data, net interest payments on US government debt have gone up from $1 billion per day during the pandemic to $2 billion.
In other words, the United States spent over $500 billion in the past year on interest payment alone.
According to Fitch Ratings, it compares with the $2 trillion spent by governments worldwide on interest, which means that one out of every four dollars spent by governments on interest is covered by the United States.
Either way, James McCormack said the debt ceiling has no useful purpose from a fiscal perspective due to it not being directly tied to the budget process.
Lawmakers are only debating whether they approve or not of the borrowing of previously adopted budgets.
“You’ve already run up the bill, so it seems strange to have a debate later over paying it back,” he said.
Furthermore, McCormack addressed the lawmakers’ debate by highlighting how ratings companies are forbidden from advising them.
“But they are getting the right advice from the Fed and Treasury: you’re playing with live ammunition here,” he said.
“This is an extremely dangerous situation. There is a lot at stake.”