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US risks credit downgrade ahead of debt default. Here’s what happened last time.

May 25, 2023

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One week before the X-date, when the U.S. could potentially default on its debt, the country’s credit rating was put on notice. Fitch Ratings warned late Wednesday, May 24, that the federal government’s gold standard AAA rating is now on “rating watch negative.”

The Treasury Department has said it can’t know for sure exactly when the U.S. will run out of funds to pay its bills until it happens, but that date is as early as June 1. Treasury Secretary Janet Yellen maintains the deadline is certainly in early June.

“The failure to reach a deal to raise or suspend the debt limit by the X-date would be a negative signal of the broader governance and willingness of the U.S. to honor its obligations in a timely fashion, which would be unlikely to be consistent with a ‘AAA’ rating,” Fitch Ratings said.

The ratings agency pointed to “increased political partisanship” in the face of the fast-approaching X-date for its negative rating watch.

“We’re not gonna default, we’re gonna solve this problem. I will stay with it until we can get it done,” House Speaker Kevin McCarthy, R-Calif., said Wednesday.

Washington politicians were still at a standoff as they broke for a week to go home for the Memorial Day holiday.

“It’s not clear to me that the extreme MAGA Republicans in the House are having these discussions in good faith,” House Minority Leader Hakeem Jeffries, D-N.Y., said.

Fitch Ratings said only a congressional deal could save the country’s AAA rating.

Avoiding default by non-conventional means such as minting a trillion-dollar coin or invoking the 14th Amendment is unlikely to be consistent with a ‘AAA’ rating and could also be subject to legal challenges,” Fitch said.

Credit ratings communicate the riskiness of investing in a country or a company. AAA is the highest mark of creditworthiness, given to the U.S. by both Fitch and Moody’s.

A Moody’s senior analyst also warned it could turn negative even before a default if politicians make it sound like it’s possible a deal won’t be reached. Moody’s currently has the U.S. at a Aaa rating with a stable outlook, its highest mark.

“If we’re getting close to the X-date and there seems to be a change in tone that seems significant, material, and changes the overall probability analysis…that’s the only basis for a potential change prior to a missed payment,” Moody’s William Foster told Reuters.

The last time the U.S. was in this position was 2011, when it was at the brink of default. For the first time, S&P Global Ratings downgraded the U.S. from AAA to AA+, even though the U.S. narrowly avoided default. That is where the U.S. rating stands at S&P today.

At the time, the downgrade was widely criticized by politicians. The day of the credit downgrade, the stock market dove. In the weeks surrounding the 2011 debt crisis, the S&P 500 index fell around 17%.

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SIMONE DEL ROSARIO: THE U-S HAS BEEN PUT ON NOTICE. FITCH RATINGS WARNING THE U-S’S TRIPLE A STATUS IS NOW ON “RATING WATCH NEGATIVE.”

FITCH BASICALLY SAYING THE CLOSER THE COUNTRY GETS TO THAT X DATE – WHEN IT CAN’T PAY ITS BILLS – THE CLOSER IT GETS TO NOT DESERVING THAT SHINY TRIPLE A RATING.

THAT X DATE COULD BE AS SOON AS ONE WEEK FROM NOW. AND WASHINGTON IS STILL IN A STANDOFF AS THEY GO HOME FOR THE MEMORIAL DAY HOLIDAY. 

REP. KEVIN MCCARTHY: We’re not gonna default, we’re gonna solve this problem. I will stay with it until we can get it don.

REP. HAKEEM JEFFRIES: It’s not clear to me that the extreme MAGA Republicans in the house are having these discussions in good faith.

SIMONE DEL ROSARIO: FITCH BLAMES “INCREASED POLITICAL PARTISANSHIP” IN THE FACE OF THE FAST-APPROACHING X DATE FOR ITS NEGATIVE RATING WATCH.

AND THE RATINGS AGENCY SAID ONLY A CONGRESSIONAL DEAL WILL DO…NOTING “AVOIDING DEFAULT BY NON-CONVENTIONAL MEANS SUCH AS MINTING A TRILLION-DOLLAR COIN OR INVOKING THE 14TH AMENDMENT IS UNLIKELY TO BE CONSISTENT WITH A ‘AAA’ RATING AND COULD ALSO BE SUBJECT TO LEGAL CHALLENGES.”

CREDIT RATINGS CARRY ENORMOUS WEIGHT IN COMMUNICATING THE RISKINESS OF INVESTING IN A COUNTRY OR A COMPANY. TRIPLE A IS THE HIGHEST MARK OF CREDITWORTHINESS, GIVEN TO THE U-S BY BOTH FITCH AND MOODY’S. 

MOODY’S IS WARNING IT TOO COULD TURN NEGATIVE EVEN BEFORE A DEFAULT IF POLITICIANS MAKE IT SOUND LIKE IT’S POSSIBLE A DEAL WON’T BE REACHED.

THE LAST TIME THE U-S WAS IN THIS POSITION? 2011, AT THE BRINK OF DEFAULT. THE S&P DOWNGRADED THE U-S FROM TRIPLE A TO DOUBLE A PLUS, A MOVE THAT WAS WIDELY CRITICIZED BY POLITICIANS BUT S&P STOOD BY IT. THAT’S WHERE ITS U-S RATING STANDS TODAY.

THE DAY IT WAS DOWNGRADED, MARKETS ROLLED. IN THE WEEKS SURROUNDED THE DEBT CRISIS IN 2011, THE S&P 500 INDEX FELL 17%. 

THIS WEEK – THE MARKET IS BARELY DOWN OVERALL, INVESTORS CLEARLY CONFIDENT THAT WASHINGTON WILL RAISE THE DEBT CEILING BEFORE DEFAULT.

I’M SIMONE DEL ROSARIO IN NEW YORK IT’S JUST BUSINESS.