Well, I didn’t speak too soon in my post this morning warning that the US credit rating is the next shoe to drop. From Fitch:
Fitch Ratings has placed the United States of America’s (U.S.) ‘AAA’ Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN). The ratings of all outstanding U.S. sovereign debt securities have also been placed on RWN, as has the U.S. Short-term foreign currency rating of ‘F1+’. The Outlook on the Long-term ratings was previously Negative. The U.S. Country Ceiling has been affirmed at ‘AAA’. Fitch expects to resolve the RWN by the end of Q114 at the latest, although timing would necessarily reflect developments and events, including the duration of any agreement to raise the debt ceiling.
KEY RATING DRIVERS
In line with Fitch’s previous statements, the RWN reflects the following key rating drivers and their relative weights: High – The U.S. authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures. The U.S. Treasury Secretary has said that extraordinary measures will be exhausted by 17 October, leaving cash reserves of just USD30bn.
Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.
– Although the Treasury would still have limited capacity to make payments after 17 October it would be exposed to volatile revenue and expenditure flows. The Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so. 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.
– 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. 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. Medium
– The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the U.S. economy. The ‘AAA’ rating reflects the U.S.’s strong economic and credit fundamentals, including:
– Its highly productive, diversified and wealthy economy; extraordinary monetary and exchange rate flexibility; and the exceptional financing flexibility afforded by the global reserve currency status of the U.S. dollar and the depth and liquidity of domestic capitalmarkets – in particular the U.S. Treasury market. The U.S. sovereign credit profile also benefits from the respect for property rights, the rule of law and a high degree of social stability.
– Fitch continues to judge that the U.S. economy (and hence tax base) remains more dynamic and resilient to shocks than its high-grade rating peers. Fiscal and macroeconomic risks emanating from the financial sector are generally low and diminishing and becoming supportive of, rather than a drag on, economic growth. Fitch forecasts economic growth to pick up from 1.6% in 2013 to 2.6% in in 2014 and to average 3% over 2015-17, before reverting to its assumed long-run trend growth rate of 2.25%. The projected recovery is supported by easing headwinds from private sector debt deleveraging, a pick-up in the housing marketand a gradual decline in unemployment.
– The ‘AAA’ rating also reflects the halving of the federal budget deficit since 2010, which is now approaching a level consistent with debt stabilisation. The Budget Control Act passed in August 2011 implied significant fiscal consolidation and Congress and the Administration have adhered to the automatic spending cuts – the sequester – specified under the Act in the absence of agreement on an alternative and equivalent set of deficit-reduction measures. In addition, the passage of the American Taxpayer Relief Act on 1 January 2013, which implied a tax increase of more than USD600bn, has also contributed to the deficit reduction effort.
– Fitch’s medium-term fiscal projections imply federal and general government (which includes states and local governments) gross debt stabilising next year and over the remainder of the decade at around 72% and 104% of GDP, respectively. This is below the 80% and 110% thresholds that Fitch previously identified as being inconsistent with the U.S. retaining its ‘AAA’ status.
– Nevertheless, public debt stabilisation at such elevated levels still render the US economy and public finances vulnerable to adverse shocks and in the absence of additional spending reform and revenue measures, deficits and debt will begin to rise again at the end of the decade. The U.S. is the most heavily indebted ‘AAA’ rated sovereign, with a gross debt ratio equivalent to double that of the ‘AAA’ median.
