For the US government, the step borders on insult to majesty: The rating agency Fitch no longer sees the US as a top debtor. Finance Minister Yellen is angry. ntv.de answers the most important questions about the credit rating.
What happened?
The rating agency Fitch has downgraded the US credit rating. So far, the rating agency had given the country the “AAA” seal of approval, i.e. the top credit rating. The new rating is “AA+”, the second best rating. The step does not come as a complete surprise. Fitch announced in May that it would downgrade its credit rating.
Who is Fitch anyway?
Fitch is a rating agency based in New York and London and assesses the creditworthiness of countries and companies. It is the smallest of the three major rating agencies – behind Moody’s and S&P.
Why are credit ratings important?
Investors often look to it. As a rule, this means that the worse the credit rating is assessed by rating agencies, the more interest countries and companies have to pay when they borrow money. They do this through bonds, i.e. securities with a predetermined interest rate and term.
How do the other major rating agencies rate the US?
Moody’s gives the USA the top rating, S&P only the second best. The world’s largest rating agency lowered the credit rating in 2011.
Aha. What does AA+ mean specifically?
The AA+ rating is one notch below AAA. This means that Fitch no longer concedes that the US has “the highest credit quality” and an “extraordinarily strong ability” to meet its financial obligations. While an AA rating still indicates “very strong ability” to meet financial obligations and “very low risk of default,” it is one notch below the “lowest expectation of risk of default” for AAA obligors.
Why is Fitch rating the credit rating worse now?
The main reason is the recent row between Democrats and Republicans over raising the US legal debt ceiling. In the spring, the government was again on the verge of default. However, the dispute has now been settled. Fitch also expects the US fiscal situation to deteriorate over the next three years and the already high national debt to continue to rise sharply.
What is the debt limit?
It was introduced to the United States in the early 20th century. The debt limit determines how much money the US government can borrow to meet its financial obligations. The US Constitution requires Congress to authorize borrowing. The flat debt limit is intended to avoid the government having to ask Congress for permission each time the Treasury Department issues a bond. If the upper limit is not increased, the state will not be able to meet all of these obligations and will not be able to pay off old debts that are due.
And what’s the problem?
For decades, the increase was only a matter of form. The debt limit has been raised or suspended almost 80 times since 1960. But during the presidency of Democrat Barack Obama, the Republicans discovered the upper limit as a political weapon, and since then there has been a partisan struggle over reaching the limit. The approaching insolvency is used as a means of pressure by one side to force concessions from the other side, which the government makes. The next dispute threatens in 2025, after the next presidential election. Then the new debt limit should be reached.
What does Fitch say about this?
The rating agency sees the recurring poker game over the debt limit as an “erosion of governance” and notes: “Repeated political deadlocks on the debt ceiling and last-minute decisions have undermined confidence in budget management.”
How is the US government reacting?
She’s not happy. US Treasury Secretary Janet Yellen said she disagreed with the downgrade. The step is arbitrary and based on outdated data. As White House spokeswoman Karine Jean-Pierre put it, it is contrary to reality to “downgrade the United States at a time when President Joe Biden has embarked on the strongest recovery of any major economy in the world.”
Will the US now have to pay more for new debt because of the downgrade?
Not yet. The effects on the bond market are small. US bonds hardly reacted to the move.
How come?
Because currently hardly anyone believes that the USA will actually become insolvent. Also, the US Treasury market is huge, worth $20 trillion. So there are few alternatives for investors if they want to put their money in very safe bonds. When S&P downgraded the US government’s credit rating in 2011, it had no significant consequences. Investors continued to buy US Treasuries, which saw yields fall.