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"A Downgrade in Credit Ratings" by Julie Jason

Originally published: August 11, 2023 (distributed by Andrews McMeel Syndication)

In August 2011, we experienced S&P's downgrade of U.S. debt from AAA to AA-plus, where it remains today (tinyurl.com/mwtyttnk). Then, just a few days ago on Aug. 1, Fitch Ratings, another credit rating agency, downgraded the long-term rating of the U.S. from AAA to AA-plus. 

     However, Moody's rating for the U.S. remains at its highest level -- AAA (tinyurl.com/bdd69pnc). The top ranking indicates that a country's long-term obligations are "judged to be of the highest quality, subject to the lowest level of credit risk" (tinyurl.com/3trc8y8f).

     Let's go through some background: Fitch is one of the "big three" credit ratings companies, along with S&P Global Ratings and Moody's Investors Service (tinyurl.com/2c8uwv8r). 

     The three are considered nationally recognized statistical rating organizations (NRSROs) (tinyurl.com/4cay4v9e), overseen by the U.S. Securities and Exchange Commission's Office of Credit Ratings, which was created in 2010 by the Dodd–Frank Wall Street Reform and Consumer Protection Act. 

     The U.S. credit rating downgrade by Fitch, officially for the "Long-Term Foreign-Currency Issuer Default Rating," reflected "the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions," according to Fitch (tinyurl.com/w5ejy6dt). 

     The "erosion of governance" included "successive debt increases over the last decade" and "only limited progress in tackling medium-term challenges related to rising Social Security and Medicare costs due to an aging population," according to Fitch.

     There were positive aspects ("structural strengths") of the U.S. situation cited by Fitch, including a "large, well-diversified and high-income economy, supported by a dynamic business environment." Also, "the U.S. dollar is the world's preeminent reserve currency, which gives the government extraordinary financing flexibility."

     However, Fitch projected that the U.S. economy will be pushed into a "mild recession" in the fourth quarter of 2023 and first quarter of 2024 due to "tighter credit conditions, weakening business investment, and a slowdown in consumption."

     What is the potential cost of a downgrade? 

     "A credit rating downgrade can lead to a number of consequences, perhaps the most obvious being an increase in the country's borrowing costs due to a perceived greater risk of default," according to a column by Frank Holmes, CEO and chief investment officer for U.S. Global Investors, an investment management firm (tinyurl.com/4s8purt7). "As a result, the U.S. government may end up having to pay more interest on its new debt issues, further deepening its debt burden."

     To pay for budget deficits, the U.S. government "borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes and Treasury inflation-protected securities (TIPS). The national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities," according to Treasury.gov's Fiscal Data website (tinyurl.com/apkxffa6).

     Treasury Secretary Janet Yellen "strongly disagreed" with the Fitch downgrade (tinyurl.com/yn4ak7rh). In her statement, Yellen added that, "Fitch's decision does not change what Americans, investors and people all around the world already know: that Treasury securities remain the world's preeminent safe and liquid asset, and that the American economy is fundamentally strong."

     Kathy Jones, managing director and chief fixed income strategist for the Schwab Center for Financial Research, said it well: "There is still no substitute for U.S. Treasuries in the global economy. The U.S. market is still the largest, most liquid and safest in the world" (tinyurl.com/3w72mj9f).

     Warren Buffett summed the situation up this way. "There are some things people shouldn't worry about," he told CNBC (tinyurl.com/3x84kukv). "This is one."