Whether or not lawmakers come to an agreement on the U.S. debt limit, the nation’s credit could still be affected by the controversy.
Key Details
- After the 2011 debt ceiling debacle, the U.S. lost its S&P AAA credit rating, and something similar could happen again due to the present-day struggle.
- If the U.S. receives another credit downgrade, it could have broader effects on the bond market and beyond.
- As the deadline draws near, most firms expect that the government will eventually reach an agreement, but some warn that getting this close to the deadline will have negative consequences, Axios reports.
Why it’s news
Credit agencies are watching the lawmaker’s maneuvers closely, especially as the June 1 deadline approaches. Fitch Ratings, Moody’s Analytics, and the S&P have commented on the ongoing debate, all with slightly different takes.
Fitch has officially put out a warning to the government, saying, “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.”
Moody’s Analytics, on the other hand, issued a more hopeful statement at the beginning of May, saying, “our baseline expectation is that, despite the fractious political environment, U.S. lawmakers will ultimately raise or suspend the debt limit before the X-date.”
Since the 2011 downgrade, the S&P has held the U.S. at an AA+ rating. In March, it issued a statement: “We expect Congress will engage in brinkmanship, but ultimately pass debt ceiling legislation, as it has on over 80 prior instances—understanding the severe consequences on financial markets and the economy of not doing so.”
A credit downgrade could be a bigger problem for the bond market because some firms have strict rules about the credit ratings of the bonds their portfolio managers can own. If other credit rating firms downgrade the U.S. from its AAA rating, some may have to sell their U.S. bond holdings. However, not all firms may be forced to do so, Axios reports.
There could be one slight upside to the U.S. credit rating taking a hit. Bonds are considered one of the safest investments, and if the government’s credit rating is downgraded, more investors may choose to purchase bonds—considering them safer than other options. If that were to happen, interest rates would actually go down.
This already happened in 2011 after the S&P downgraded the U.S. credit rating.
