With so much attention and questions surrounding the recent U.S. debt downgrade, I thought it might be a good time to discuss what exactly happened and what it could mean for the economy and the consumer.
The Chickens Come Home to Roost
We see the debt clock ticking and think nothing of it–it’s all good as long as payments are made. But what happens when there’s a debt ceiling showdown and a close call with a government shutdown?
Well, in the eyes of Fitch Ratings, the combination of these factors meant it was time for the proverbial chickens to come home to roost. Below is an overview of the who, what, why, and how.
- Who Fitch Ratings Is:Fitch Ratings is a credit ratings agency based in New York and London. Its role is to provide insight into creditworthiness for investors who rely on these ratings as a guide for which investments will not default and ideally yield a solid return.
- What the Credit Ratings Agency Did: Fitch’s Issuer Default Ratings scale ranges from AAA (best) to D (worst). The U.S. long-term rating was recently downgraded from AAA to AA+, a one-notch markdown from the gold standard of AAA.
- Why This Happened: The agency downgraded the U.S. due to concerns about the erosion of governance and predicted fiscal deterioration over the next three years. This decision was made after Fitch had placed the U.S. on a negative watch in May, citing the debt ceiling standoff as a contributing factor. The federal budget deficit has alsorisen rapidly since the debt ceiling showdown in May/June, which could be a driver in the credit rating revision.
- How It Could Impact Americans:The debt downgrade could increase mortgage and borrowing rates, as more uncertainty can translate to higher interest rates for consumers.
A Reminder: We Have Been Here Before
While the news headlines make it seem like the sky is falling on U.S. creditworthiness, it’s important to know that we have been here before. In 2011, Standard and Poor’s (now known as S&P Global Ratings) downgraded the U.S. debt from its highest mark of AAA to AA+ after the U.S. had maintained the top rating since 1917. So, the recent downgrade by Fitch is the second in U.S. history. Markets slumped back in 2011 on the announcement but eventually recovered. This time, the debt downgrade market reaction has been far more muted, most likely because the announcement merely confirms what many market participants already knew. (Markets typically respond more to new information.) Perhaps the downgrade is not as cataclysmic as it sounds.