2023-08-02 17:07:43
Ratings agency Fitch downgraded the United States’ debt rating one notch from the highest AAA to AA+ on Tuesday, but the impact on the world’s largest economy will be largely symbolic, at least in the short term.
(World stock markets turn red due to downgrading of the US rating).
Fitch attributed the cut to “governance erosion” following delays in congressional debt limit negotiations and last-minute deals to avoid default.
What is the AAA rating?
To assess the solvency of States, communities or companies, the three main rating agencies in the world -S&P Global, Fitch and Moody’s- use scales of letters or grades, ranging from AAA, considered above any risk, to C or D, which flag potential refund defaults.
The measurements are made by analyzing parameters of economic growth, indebtedness, deficit, expenses, fiscal income, and the diagnosis serves as a guide for investors.
This also means that the lower the assigned note, the higher the interest that investors will ask to lend money to a State or a company, because their debt will be considered more risky.
Which countries retain triple A?
Only a handful of countries retain the top rating from the big three rating agencies: Australia, Denmark, Germany, the Netherlands, Sweden, Norway, Singapore, Switzerland, and Luxembourg. Others only have the best rating in one or two of the big three credit bureaus.
Who has lost triple A?
In Europe, several countries lost top ratings after the 2008 financial crisis. In 2011, S&P Global stripped the United States of its AAA rating after a lengthy congressional fight over the debt limit, but Moody’s, which has records since 1949, continues to give him the maximum grade. The United States needs to solve the recurrence of the problems linked to its debt issuance limit, and find “long-term” solutions, if it wants to recover triple A, Richard Francis, head of Fitch Ratings for the Americas, declared this Wednesday on CNBC.
What are the consequences?
The triple-A loss sends a signal to the markets, which at the moment is mostly symbolic, as the US continues to do well and its bonds are still regarded as the safest and most liquid in the world.
The rate of return on the 10-year Treasury note, a benchmark for the market, broke the 4% barrier for the third time this year before Fitch’s announcement, but went back below that level immediately after.
(Fitch downgraded the US credit rating one notch.)
The rates on those bonds are the yield they offer or the interest the Treasury pays for borrowing. The upward pressure in recent months is due above all to the increase in the reference rates of the Federal Reserve (Fed), the central bank of the United States.
The Fed has successively increased its interest rates in an attempt to make credit more expensive and thus cool consumption and investment, and thereby contain the pressure on prices in a context of high inflation.
The dollar traded slightly higher against the euro on Wednesday, as the US currency is a safe haven.
“The US dollar is the world’s most important reserve currency, giving the government extraordinary financing flexibility,” Fitch said in its conclusions, suggesting the United States will continue to comfortably find buyers for its debt.
(Fitch downgrades US debt one notch from AAA to AA+.)
The US economy is strong and the unemployment rate is below 4%, but “the public deficit is on track to reach 6% of GDP in the current fiscal year,” Capital Economics analysts said in a note published Wednesday. .
According to that consultancy, the interest costs of government debt may double in the coming years, although much will depend on the Fed’s ability to quickly initiate a cycle of interest rate cuts. If that doesn’t happen, “then the debt dynamics can quickly become unsustainable,” the report warns.
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