As the U.S. government shutdown enters day 19, ratings agency Fitch has threatened to downgrade America’s sterling AAA rating. If the country’s debt ceiling is negatively impacted by the gridlock in Congress, Fitch claims this would be a significant sign of weakness.
And after last night’s address from the Oval Office, it appears both sides of the stalemate are only getting more entrenched – even though the President never declared an official state of emergency, like many analysts had predicted.
As it turns out, the analysts were wrong (as they often are), and in the non-state of emergency afterglow, the markets continue to rise. The Dow Jones Industrial Average opened at a 101-point gain and the S&P 500 climbed slightly as well. Both indexes have only gone up since then in today’s trading session.
But Fitch (and their esteemed analysts) don’t care about that. They’re more concerned with rising debt levels and interest rates, which admittedly could threaten long-term prosperity.
James McCormack, global head of sovereign ratings at Fitch told CNBC in an interview that, “people are looking at the CBO (Congressional Budget Office) numbers. If people take the time to look at that you can see debt levels moving higher, you can see the interest burden in the U.S. government moving decidedly higher over the next decade.”
Later on, in an event in London, McCormack continued in that same vein:
“If this shutdown continues to March 1 and the debt ceiling becomes a problem several months later, we may need to start thinking about the policy framework, the inability to pass a budget… and whether all of that is consistent with triple-A.”
And in a recent report, Fitch (McCormack’s employer) made it clear that its outlook on a country’s credit-worthiness is weighted heavily on its ability to legislate new policies:
“Evidence of greater dysfunction in fiscal policymaking could still contribute to negative pressure on the U.S. rating — (and) this is especially the case as deficits continue to increase.”
Concerns over rising debt, interest rates, and political inaction are all valid – if you’re the head of a central bank.
But as a ratings agency, will those factors ever hurt the United States enough to prevent it from fulfilling financial commitments?
The U.S. has never in its history defaulted on its obligation to pay debts – that includes Treasury bonds and even debts to sovereign borrowers. When America says its going to pay, it pays.
In 2011, the United States was downgraded to AA+ (excellent) from AAA (outstanding) by S&P, and in 2013 Fitch issued a similar threat – citing the rising debt ceiling as a cause for concern, just like in their press release earlier today.
Ratings agency Egan-Jones took the U.S. all the way down to AA- in 2012, worried by a rising debt-to-GDP ratio.
Seven years later, the American economy is still firing on all cylinders, having logged sky-high GDP growth in 2018 and pristine employment numbers. Though this kind of growth is unsustainable, it was also unthinkable during Obama’s reign – so much so that he claimed it would never happen (for at least four years) after he left office.
These ratings agencies, especially Fitch, are still trying to repair their reputations 11 years after the housing meltdown of 2008. By “firing back” at a government that goes against their analysis, Fitch – along with the rest of the “big three” – can generate headlines and stay relevant, even though they’ve burned millions of investors in the past.
They were the ones pushing mortgage-backed securities, after all, raking in profits while falsely rating products that were leagues beneath junk status.
Outside of a full-blown world war, the United States does not deserve a ratings downgrade of any kind. Even then, Uncle Sam has shown us in the past that he has deep pockets during near-cataclysmic events.
As it stands right now, Fitch has a higher chance of folding before the ol’ U.S. of A. ever does by a longshot, and warnings like the one made this morning show me that the pencil pushers on Wall Street are still woefully out of touch.
DC has demonstrated to my satisfaction that they are totally unable to balance a budget. They can obviously run deficits for a long time. (They already have.) As Herb Stein said, ‘if something can’t go on forever, eventually it will end.” That only leaves one question: how?