The rating agency “Fitch Ratings” has downgraded US Federal Government Credit Rating to AA+ from AAA late Tuesday evening.
A couple of things to note:
- Credit rating is similar to bonds, as it is to personal credit rating. The higher the rating, the lower interest the borrower has to pay because it is seen as a lower risk of default.
- This is not the first time a rating agency has lowered the credit rating of the US government. In 2011 S&P downgraded US credit due to debt ceiling issues (among other things, mainly politics).
- Fitch cites “debt ceiling brinksmanship” and also that minting “a trillion dollar coin” or involving the 14th amendment is unlikely to be consistent with a “AAA” rating.
While I was caught off guard by the announcement, as most financial professionals were, I am not terribly surprised. The amount of debt we have taken on and the massive spending by the government has inflated the federal balance sheet. As you all know, I am not a doomsday guy and I do not think this is the beginning of the end. This is the way our government works, checks and balances. One party spends the other complains about spending (insert either party doing the spending or the complaining).
This is excellent fodder for presidential campaigns and will certainly be a talking point on the late shows. However, just as in 2011, I do not expect this to ruin our economy. There may be pain up ahead, as denoted by growth slowing and the 2nd longest inverted yield curve ever.
That being said, this is nothing to simply write off, and we will watch for any backlash. Markets were minimally down the day after the downgrade, so no one got too spooked.