How much does the US credit rating matter?

Fitch Ratings Cuts the U.S. Debt-Clean to AA+: A Wake-up Call for Responsible Government

Fitch Ratings cut the United States’ credit rating by one notch, from the top-rated AAA to AA+, saying rising deficits and political brinkmanship are imperiling the government’s ability to pay its debts.

The downgrade comes two months after the Biden administration and House Republicans agreed to suspend the government’s debt ceiling in a last minute deal, narrowly avoiding a potentially disastrous federal default.

Fitch cited alarm over the country’s deteriorating finances and expressed major doubts about the government’s ability to tackle the growing debt burden because of the sharp political divisions, exemplified by the brinkmanship over the debt ceiling that brought the government close to a disastrous default.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters,” the credit rating agency said in announcing the downgrade. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

Most importantly, the dollar remains the world’s top reserve currency. Investors all over the world, from other top central banks to pension funds, hold trillions of U.S. government debt, and that’s unlikely to change simply because of Fitch’s downgrade. The U.S. dollar is seen as a safe haven.

The debt deal signed in June did not address the longer term challenges in funding Social Security and Medicare for an aging population and the new spending limits are only a small portion of the overall budget.

Recent years have seen widening government deficit due to tax cuts and spending. The cost of shoring the gap has gone up. Government interest payments in the first nine months of the fiscal year totaled $652 billion — a 25% increase from the same period a year earlier.

“Today’s downgrade should be a wake-up call,” said Maya Macguineas, president of the Committee for a Responsible Federal Budget. We are on an unsustainable fiscal path. We need to do better.

Why is the U.S. debt ceiling standoff viewed as an investment? An analysis from Goldman Sachs after the S&P decision

For almost a century, U.S. government bonds have been seen as some of the safest investments in the world — in large part because it seemed all-but-guaranteed the country would never miss a payment.

Treasurys have become very popular with companies and countries around the world. But the country’s latest debt ceiling standoff have reinforced genuine concerns that the U.S could default for the first time.

The country’s ability to govern more than a decade ago was identified by S&P as a major risk, and many believe the divide has worsened since then.

Goldman Sachs made it clear on Wednesday: “The downgrade contains no new fiscal information and projections are similar to their own.”

“The downgrade should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change,” Goldman Sachs said.

Losing the AAA rating further removes the U.S. from a small group of countries that still maintain the top-notch rating from all three major agencies. The group of nine are Australia, Denmark, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland.

Those are real problems — and failure to reverse the country’s surging deficits or bridge its political divisions — can have real critical consequences.

President Obama addressed the markets after the S&P decision and Treasury Secretary Tim Geithner angrily denounced the decision.

During the 2008 Global Financial Crisis, a lot of the subprime mortgage bonds that went bust had been highly rated by the ratings agencies, exposing flaws in the system.

This is where it gets dicey. While ratings remain an important part of the financial system, the agencies that issue them have come under a good deal of criticism.

Although there are slight differences, all three issue ratings on a similar sliding scale that start with AAA as the top-rated investment, that goes all the way down alphabetically to D, which typically denotes a default.

A credit rating is the same thing as a personal score and can help determine interest that a country or company will need to pay.