The US government’s bond rating rests on a centuries-long record of always paying its debts. Right now, it’s also hanging on faith in modern political brinkmanship.
(Bloomberg) — The US government’s bond rating rests on a centuries-long record of always paying its debts. Right now, it’s also hanging on faith in modern political brinkmanship.
While President Joe Biden negotiates with Republicans in Congress on a plan to raise the debt limit and avoid an unprecedented default as soon as early next month, Wall Street’s credit-rating companies are standing pat — assuming disaster will be averted, even at the 11th hour.
Moody’s Investors Service’s William Foster, a senior credit officer, said in an interview on Wednesday that he was “hearing the right things out of Washington,” and his firm has kept the US’s top rating intact through the fitful negotiations since. So has Fitch Ratings.
Even S&P Global Ratings, which in 2011 drew fire for downgrading the US from AAA after a similar brush with default, has retained a stable outlook on the rating during the latest fracas, anticipating a deal will be struck.
But the repeated political tussles are chipping away at the stability and predictability that are supposed to support Washington’s status as the risk-free standard in world financial markets.
“While we do not expect S&P to downgrade the US further, Moody’s or Fitch may put the US on negative outlook or even negative watch due to further debt ceiling brinkmanship,” said Priya Misra, global head of rates strategy at TD Securities. She added that any step to “lower or threaten to lower the US credit rating could result in a broad risk-off market reaction.”
So far, the three major bond raters have been reluctant to signal any shift in their current guidance because they see it most likely that the debt ceiling will be raised before the so-called X date when the US Treasury runs out of cash. On Monday, after Treasury Secretary Janet Yellen warned that could happen as soon as June 1.
Debt-Limit Showdown Splits Credit Raters on US Downgrade Trigger
None of the raters has downgraded the US since S&P did so 2011, when a similar impasse prompted it to drop its grade from AAA to AA+, the second-highest rung.
That decision drew the wrath of US officials, who said its analysis was flawed given that the US is the linchpin of the global financial system. While both Moody’s and Fitch have made adjustment to the US outlook amid debt-limit episodes, they never downgraded the US’s primary credit rating as S&P did.
The Treasury market’s status as the haven of global markets has been so ingrained that even after the S&P downgrade it rallied as investors pulled out of stocks in fear of the fallout. For the same reason, this time around only Treasury bills set to mature next month have seen yields rise due to the risk of a default.
The US’s credit rating, however, would likely suffer another blow if Congress can’t reach an agreement in time. On Monday evening, House Speaker Kevin McCarthy said he and Biden has a productive meeting though a deal has remained elusive.
Fitch said in an April report that increasing partisanship and the use of debt-limit standoffs to advance political agendas is a “recipe for more, not less, confrontation around the US debt limit in the years ahead” that could erode confidence in the US and affect its rating. The company said the US’s AAA rating would be at risk if the Treasury decided to make good on some obligations, including its bonds, but not others — like payments to certain contractors — after running out of funds.
Officials at S&P referred to a statement on the US rating from March, when the company said it expects that Congress will “ultimately pass debt ceiling legislation, as it has on over 80 prior instances —understanding the severe consequences on financial markets and the economy of not doing so.”
Moody’s Foster said that’s his firm’s base case scenario, too. But he said the company would downgrade the federal government by one notch to Aa1 if a bond payment is missed but the standoff is resolved soon after.
“So there could be a missed interest payment that would be delayed a few days,” he said. “But there would be no loss to investors, and that would be important.”
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