Default or Not, U.S. Already Has Endangered Its Credit Rating

Published Oct 15, 2013. By Kevin G. Hall.

Credit ratings agencies may not wait for a default to downgrade U.S. government creditworthiness.

Standard & Poor’s downgraded U.S. government bonds to AA from AAA amid the August 2011 debt-ceiling debacle. The other two major ratings agencies _ Moody’s Investors Service and Fitch Ratings _ didn’t follow suit at the time, but Fitch said late Tuesday that it had put the United States on a watch list, meaning U.S. bonds might be downgraded.

Fitch promised to resolve the status before the end of March, depending on the outcome of the political squabbling, which could extend into next year even with a short-term resolution now. And S&P doesn’t rule out a downgrade.

For now, it’s a warning that politicians are showing just why U.S. bonds no longer are considered to be worthy of the gold-plated AAA status. The AA designation means that U.S. bonds are now considered a riskier investment than those issued by Canada or Germany.

S&P spokesman John Piecuch told McClatchy it was “worth reiterating that this level of discord, which is not consistent with a AAA rating, is a dominant reason the U.S. sovereign rating is no longer rated AAA.”

Financial markets weren’t waiting for the downgrade, which reflects a greater risk of default and might push interest rates up.

Big money-market players such as Fidelity Investments and JPMorgan Chase have been dumping short-term U.S. bonds. Citigroup spooked the markets Tuesday by telling its customers it was in good shape because it had unloaded U.S. bonds.

That’s hardly a vote of confidence, and investors buying bonds that mature in the next six weeks were demanding on Tuesday an interest rate equal to what they’d usually seek to hold a riskier six-month bond.

It all leads to the question: Why hasn’t there been another downgrade?

At Fitch, the signals in the current fight are warning signs that are worth watching closely.

“The U.S. risks being forced to incur widespread delays in payments to suppliers and employees, as well as Social Security payments to citizens – all of which would damage the perception of U.S. sovereign creditworthiness and the economy,” the Fitch statement said.

Fitch added that the U.S. standing in the world is at stake, too.

“The prolonged negotiations over raising the debt ceiling . . . risk undermining confidence in the role of the U.S. dollar” as the world’s top currency, Fitch said, “by casting doubt over the full faith and credit of the U.S.”

Moody’s Investors Service was more optimistic, citing a much lower deficit than was the case in 2011 and an improving economy.

“We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” Moody’s said in an Oct. 7 report. A spokesman declined further comment Tuesday.

A ratings downgrade means that some big institutional investors no longer can hold U.S. government bonds in their portfolios because they’re allowed to hold only those with the AAA rating. And the interest rate the government pays investors who buy 10-year bonds influences what it costs consumers to borrow for items that require longer payoffs, such as mortgages or car loans.

“The long-term outlook is still as unsustainable as ever. As we get closer to the debt limit (deadline), depending on what happens here you might find the ratings agencies taking another look at this and being more negative,” said Bob Bixby, the head of the budget watchdog group Concord Coalition.

The question of ratings-agency silence will only grow if Congress allows the Treasury Department to run out of the “extraordinary measures” it’s deployed since May to ensure that creditors are paid in full. Secretary Jacob Lew has said that’s Thursday, although the nonpartisan Congressional Budget Office thinks it will happen sometime after next Tuesday.

The Treasury Department should have enough daily revenue coming into government coffers to cover the Oct. 31 interest payment of roughly $6 billion that’s due to bondholders, the Moody’s report said.

It gets iffier in November. Bondholders are owed almost $30 billion on Nov. 15, and it’s a month when the government historically spends more than it receives.

“In November 2012, expenditures were more than double revenues, resulting in a $172 billion cash deficit,” Moody’s noted. “November is the first month the government will have to select which obligations it will meet if the debt limit is not raised.”

Moody’s analysts think there are options should borrowing authority run completely dry on Thursday. These include sales or swaps of gold, of which the United States has 261.5 million ounces, valued at more than $300 billion.

The Obama administration also could mint a coin in a huge denomination, Moody’s said, which could be deposited with the Federal Reserve in exchange for cash.

Congress could always suspend the debt limit, as it did earlier in the year, to allow for continued negotiations.

The ongoing fight in Washington amounts to horrible marketing for Product USA. Congress and the Obama administration have handed China a megaphone as it calls for an alternative to the U.S. dollar as the world’s reserve currency. China is the single owner of U.S. government bonds, holding $1.27 trillion in June, the latest official reading.

“Instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas,” said an editorial posted Monday by Xinhua, China’s official state news agency, calling also for “a new international reserve currency that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”