Fitch Ratings put America’s triple-A credit rating on watch for potential downgrade Tuesday, saying “the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default." It raised concerns that the U.S. "risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens -- all of which would damage the perception of U.S. sovereign creditworthiness and the economy."
Fitch’s move comes at the end of another frustrating day in Washington. Obstructing hopes for a deal, the Senate put its negotiations on hold pending a renewed effort by House Republicans to vote on a plan to reopen the government and raise the nation’s debt limit. The Treasury has said that on (or about) Oct. 17, the U.S. will have run out of cash to pay its bills.
What does Fitch’s action mean for U.S. consumers?
Nothing at the moment, but there is a risk Treasury rates will rise if the market loses confidence in America’s ability to pay its debts. If that occurs, borrowing costs would rise sharply for all borrowers and on all types of loans, including mortgages, car loans, student loans and credit cards.
Notably, Fitch refrained from actually cutting the U.S.’s triple-A rating as Standard & Poor’s did in 2011, the last time Congress came close to hitting the nation’s debt ceiling, the limit on borrowing Congress sets for the nation. That was the first time in its history the U.S.’s debt was rated lower than AAA – the highest designation – by any of the major credit rating agencies: S&P, Fitch and Moody’s.
In theory, a lower credit rating – or the mere threat of a downgrade – would result in higher borrowing costs for the issuer, be it the U.S. government or a corporation.
However, U.S. borrowing costs actually fell after S&P’s 2011 downgrade as U.S. Treasuries were still viewed as a “safe haven” -- even if the tumult was focused around America’s ability to repay its debts. The yield on the 10-year Treasury note was 2.56% when S&P lowered the country's rating to AA+ on Aug. 5, 2011; S&P never changed the rating back to AAA, but Treasury yields subsequently fell to as low as 1.63% in May 2013 where they bottomed out.
But this time might be different. U.S. Treasury prices have fallen this week – sending yields higher – as Congress’s inability to reach a deal to reopen the government and raise the debt ceiling have raised the specter of America defaulting on its debt for the first time since the Republic’s founding. The yield on the 10-year Treasury is currently 2.73%.
“The prolonged negotiations over raising the debt ceiling -- following the episode in August 2011 -- risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S.,” Fitch said in its press release. “This ‘faith’ is a key reason why the U.S. AAA rating can tolerate a substantially higher level of public debt than other AAA sovereigns.“
Has this happened before?
Rating agencies have put America’s credit rating on watch for possible downgrade several times in recent years. In 2011, Moody’s, Fitch and S&P each placed negative outlooks on the U.S.’s rating, but only S&P went ahead with an actual downgrade.
Will anything happen because of the "rating watch negative"? Will it cost the U.S. money?
An outlook change is the equivalent of a "shot across the bow" by a rating agency. Fitch had indicated it would take such an action last week, so Tuesday’s warning should not have a direct effect on the U.S.'s borrowing costs.
What happens if the negative watch doesn't get removed?
Over time, a negative credit rating could result in higher borrowing costs if, as Fitch notes, investors lose faith in the dollar.
How much pressure does this put on Washington to make a deal?
Senate Majority Leader Harry Reid referenced the threat of a rating agency downgrade on Tuesday morning, so Congressional leaders are aware of the potential implications of their impasse. Fitch’s action may put more pressure on Congress to make a deal, but only marginally. Since the shutdown began on Oct. 1, myriad economists and policymakers have warned of the economic dangers of Washington’s collective dysfunction, will little notable impact thus far.