If the U.S. government defaults on its debt even for just a few hours, it could have long-lasting consequences for the nation’s future. Three major ratings companies — S&P Global Ratings, Moody’s and Fitch Ratings — play a big role in how damaging those consequences can be.
Because the financial fallout of a default would be severe, the agencies expect lawmakers to come to an agreement before the government runs out of cash to pay its bills, which could happen as early as June 1. But if the government ends up missing a debt payment, all three companies have vowed to lower the rating of the United States as a borrower, and they may be reluctant to restore it to its previous level, even if a deal is reached soon after the default.
On May 24, Fitch fired its first shot across the government’s bow, placing the United States’ rating on watch for a downgrade, a move that “reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit,” the agency’s analysts warned.
The United States has never deliberately reneged on its debt in the modern era, but even a brief default would alter the perception of debt-ceiling brinkmanship as political theater and turn it into a real risk to the creditworthiness of the government, Moody’s has warned.
“Our view is that we would need to reflect that permanently in the rating,” said William Foster, the lead analyst for the United States at the rating agency. The agency has said that if the Treasury Department misses one interest payment, its credit rating would be lowered by a notch. For the United States to regain its previous top rating, according to Foster, lawmakers would have to significantly alter the debt limit or remove it entirely.
Credit ratings, which range from D or C (for S&P and Moody’s scales) to AAA or Aaa for the most pristine borrower, are embedded in financial contracts around the world, at times dictating the quality of debt that pension funds and other investors can hold or the types of assets that can serve as collateral to secure transactions. Ratings also signal the soundness of a nation’s finances, with lower-rated countries tending to face higher borrowing costs.
For the United States, a debt-limit deadlock that resulted in a default “would not be consistent with the highest rating possible,” Foster said. “But if that rule is removed, if it was reformed in a way that it was no longer a major concern in terms of creating a default scenario, then that would be a context for potentially revisiting the credit profile and that maybe could result in bringing it back to Aaa.”
S&P lowered the credit rating of the United States by one notch during a debt-limit bout in 2011, even though a deal was eventually reached and default averted. The agency has kept the rating at this slightly lower level, AA+, ever since.
“The thing that was most powerful in the 2011 decision was the political setting and 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 then. “The current debate validates S&P’s decision to cut the rating and leave it there.”
A similar move by either Fitch or Moody’s would drop the United States from a small club of the most highly rated debt issuers in the world. (Many investors still consider the United States triple-A, since that’s its rating from two of the three authorities.) Moody’s awards its Aaa rating to only 12 countries, and a downgrade would place the United States in a category beneath the likes of Germany, Singapore and Canada.
The United States’ standing may suffer even without a default. Foster said crossing the so-called X-date — when the government runs out of cash to pay all its bills, which could come as soon as June 1, according to the Treasury — could be enough to lower Moody’s “outlook” of the country’s rating, referring to an opinion on the likely direction of a borrower’s rating, similar to the step Fitch took Wednesday.
Even a temporary deal to suspend the debt limit for a short period might not be enough to mollify the ratings firms. A spokesperson for Fitch said that a short-term deal, rather than one to raise the debt ceiling long term, would “only buy time.”
“Developments in the coming days will be the focus of Fitch’s rating assessment,” the spokesperson said.
The United States benefits from its central role in the global economy, with the dollar the dominant currency in world trade and U.S. government debt the largest debt market in the world. Doubts about its creditworthiness could spook foreign investors and governments, which are major holders of U.S. debt, threatening the nation’s ability to finance itself on terms as favorable as in the past, and potentially even upsetting its international standing.
“That’s not good for the United States,” Indonesia’s finance minister, Sri Mulyani Indrawati, said at a recent gathering of global financial leaders.
Foster declined to comment on whether he had briefed the U.S. government on Moody’s plans for its assessment of the country’s credit rating as the debt-limit standoff continues.
“We can’t talk about our discussions with issuers, including governments, but we can say that we have ongoing discussions throughout the year, and sometimes more high-frequency discussions depending on what’s going on in a certain country at a time,” Foster said. “We always have an open channel with those governments, including the U.S.”
c.2023 The New York Times Company. This article originally appeared in The New York Times.