May 26, 2023 - Economy

What the credit rating agencies are saying about the U.S.

Animated illustration of the American flag with the stars shaking in fear.

Illustration: Aïda Amer/Axios

Setting aside whether the U.S. actually ends up defaulting on its debt, Washington's hyper-partisan approach to the basic functions of government — like paying debts — could effect America's reputation as a borrower.

Why it matters: If another credit ratings agency strips the U.S. of its AAA rating — which S&P did after the 2011 debt ceiling fight — it could have ripple effects in the bond market that are tough to predict.

What they're saying: Fitch is warning, Moody's is hopeful, and S&P is largely silent.

  • Fitch on Wednesday formally put the U.S. on notice that it's AAA rating is at risk, 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 last public statement on the U.S. rating came in early May, when it said "our baseline expectation is that, despite the fractious political environment, US lawmakers will ultimately raise or suspend the debt limit before the X-date."
  • S&P — which has held the U.S. at a lowly AA+ rating ever since the 2011 downgrade — last commented in March: "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."

Between the lines: Some firms manage money according to strict rules that stipulate the credit ratings of the bonds that portfolio managers are allowed to own. In theory, if another major credit rating firms determine the U.S. is no longer AAA, some might be forced to sell or reshuffle their holdings.

The intrigue: For regular people, getting dinged on your credit report means your cost to borrow money will almost certainly rise. But it's unlikely to work that way for the U.S. government — at least not immediately.

  • That's because of the unique position that U.S. government bills and bonds play in the financial system, where they're essentially treated as the closest thing to being a completely safe investment.
  • That means, the odds are that the uncertainty of default or the aftermath of another downgrade push investors to the safety of buying U.S. government bonds. That pushes interest rates — or the actual costs of borrowing for the government — lower.
  • This is actually what happened after the 2011 S&P downgrade.

The bottom line: It might not make sense in the context of a household, but U.S. government isn't a household. After all, most households aren't the preeminent military and economic power on earth. At least mine isn't.

Go deeper: Listen to the Axios Today podcast, where Emily Peck, filling in for host Niala Boodhoo, and Matt Phillips explain what the risk of a default means for the U.S. government's reputation.

Go deeper