Default on US Debt Risks ‘Permanent’ Deting Nation’s Credit Rating

If the US government is unable to pay its debts for even a few hours next week, it could have long-lasting consequences for the country’s future. Three major rating agencies – S&P Global Ratings, Moody’s and Fitch Ratings – play a big role in how damaging those impacts can be.

Because the financial ramifications of a default would be severe, the agencies expect lawmakers to come to an agreement before the government runs out of money to pay its bills, which could happen as early as next month. But if the government ultimately misses a debt service, all three companies have vowed to downgrade the United States’ credit rating as a borrower, and may be reluctant to return it to previous levels, even if there is a shortfall shortly after the acquisition. deal is reached. standard.

The United States has never deliberately waived debt in modern times, but even a momentary bankruptcy would change perceptions of the debt ceiling as political theater and make it a real risk to government credit, Moody’s warned.

“Our view is that we should permanently reflect that in the rating,” said William Foster, chief analyst for the United States at the rating agency. The bureau has said that if the Treasury Department misses one interest payment, its credit rating would drop by a notch. According to Mr. Foster, lawmakers would need to significantly change the debt limit or scrap it altogether to allow the United States to regain its previous top score.

Credit ratings, which range from D or C (for S&P and Moody’s scales) to AAA or Aaa for the most impeccable borrower, are embedded in financial contracts around the world and sometimes determine the quality of debt that pension funds and other investors can hold or the types of assets that can serve as collateral to secure transactions. Ratings also indicate the health of a country’s finances, with lower-rated countries often experiencing higher borrowing costs.

For the United States, a debt limit deadlock that resulted in a default “would not be consistent with the highest possible rating,” Foster said. “But if that rule is dropped, if it’s reformed in such a way that it’s no longer a big concern in terms of creating a default scenario, then that would be context to potentially rethink the credit profile and that might matter lead it back to Aaa.

S&P downgraded the credit rating of the United States by one notch during a debt limit in 2011, though a deal was eventually reached and bankruptcy averted. The agency has kept the rating at this slightly lower level, AA+, ever since.

“What was most powerful about the 2011 decision was the political setting and that you had a very clear path to default. And it still is,” said John Chambers, who was part of the S&P team that downgraded the government at the time. “The current debate confirms S&P’s decision to downgrade and leave it there.”

A similar move by Fitch or Moody’s would take the United States out of a small club of the world’s highest-rated debt issuers. (Many investors still view the United States as triple-A, as that is the rating of two of the three authorities.) Moody’s assigns its Aaa rating to only 12 countries, and a downgrade would put the United States in a category below those of Germany, Singapore and Canada.

The prestige of the United States may suffer even without default. Mr Foster said passing the so-called X date – when the government runs out of money to pay all its bills, which the Treasury says could come as early as June 1 – could be enough to shake up Moody’s “prospects” of the rating of the country, referring to an opinion about the likely direction of a borrower’s rating.

The United States benefits from its central role in the global economy, with the dollar as the dominant currency in world trade and the US national debt as the largest debt market in the world. Doubts about creditworthiness could deter foreign investors and governments, which are large debt holders of the US, threatening the country’s ability to finance itself on terms as favorable as in the past and possibly even tarnishing its international reputation.

“That’s not good for the United States,” Indonesia’s finance minister, Sri Mulyani Indrawati, said at a recent meeting of global financial leaders.

Mr Foster declined to comment on whether he has informed the US government of Moody’s plans for its assessment of the country’s creditworthiness as the debt limit deadlock continues.

“We can’t talk about our discussions with issuers, including governments, but we can say that we have ongoing discussions throughout the year, and sometimes more frequent discussions depending on what is going on in a particular country at a given time. ” Foster said. “We always have an open channel with those governments, including the US”