U.S. Debt Default Could Damage Nation’s Credit Rating

U.S. Debt Default Could Damage Nation’s Credit Rating

If the US government defaults on its debt by even a few hours next week, it could have long-term consequences for the country’s future. Three major rating agencies – S&P Global Ratings, Moody’s and Fitch Ratings – contribute significantly to how damaging these consequences can be.

Because a default would have serious financial consequences, authorities expect lawmakers to reach an agreement before the government runs out of money to pay its bills, which could be as soon as next month. However, if the government defaults on its debt, all three companies have vowed to downgrade the United States’ rating as a borrower, and they may hesitate to restore it to previous levels even if an agreement is reached soon after the default.

Moody’s has warned that the United States has never intentionally defaulted on its debt in modern times, but even a brief default would change perceptions of the risky debt ceiling as political theater and turn it into a real risk to government creditworthiness.

“We think we need to consistently reflect that in the rating,” said William Foster, the rating agency’s senior analyst for the United States. The agency said the Treasury’s credit rating would be downgraded by one notch if the Treasury missed an interest payment. For the United States to regain its previous peak rating, Foster said lawmakers would have to significantly change the debt limit or remove it altogether.

Credit ratings, ranging from D or C (for S&P and Moody’s scales) to AAA or Aaa for the borrower with the highest credit rating, are enshrined in financial contracts around the world and sometimes determine the quality of debt, pension funds and other investors may hold or the types of assets that may be used as collateral to secure transactions. Ratings also signal the soundness of a country’s finances, with lower-rated countries tending to struggle with higher borrowing costs.

For the United States, a standstill on the debt limit that resulted in a default “would not be consistent with the highest possible rating,” Foster said. “But if that rule is removed, if it is reformed in a way that it is no longer a major problem in terms of creating a default scenario, then that would provide context for a possible credit profile review and that could potentially lead to an agreement. “It back to Aaa.”

S&P downgraded the United States’ credit rating by one notch during a debt-containment crisis in 2011, although an agreement was eventually reached and the default averted. Since then, the agency has left the rating at the slightly lower AA+ level.

“The most important thing about the 2011 decision was the political environment and the fact that you had a very clear path to default. And it’s still there,” said John Chambers, who was part of the S&P team that downgraded the government’s rating at the time. “The current debate confirms S&P’s decision to downgrade and leave the rating.”

A similar move by Fitch or Moody’s would remove the United States from a small club of the world’s highest-rated debt issuers. (Many investors still consider the United States to be triple-A because that’s the rating from two of the three agencies.) Moody’s only assigns its Aaa rating to 12 countries, and a downgrade would put the United States in a category below those like Classify Germany, Singapore and Canada.

The reputation of the United States could suffer even without a default. Mr Foster said that exceeding what is known as the country’s rating, which refers to an opinion about the likely direction of a borrower’s rating.

The United States benefits from its central role in the global economy, with the dollar being the dominant currency in world trade and US government debt being the world’s largest debt market. Doubts about the country’s creditworthiness could alienate foreign investors and governments, which are major holders of US debt, jeopardize the country’s ability to obtain funding on the same favorable terms as in the past, and possibly even jeopardize its international standing.

“This is not good for the United States,” Indonesian Finance Minister Sri Mulyani Indrawati said at a recent meeting of global finance leaders.

Mr Foster declined to comment on whether he had briefed the US government on Moody’s plans to assess the country’s creditworthiness amid the debt ceiling conflict.

“We cannot discuss our discussions with issuers, including governments, but we can say that we have ongoing discussions throughout the year and sometimes more frequent discussions depending on what’s going on in a particular country,” he said Mister . said Foster. “We always have an open channel with these governments, including the US.”