The United States faces, with the possibility of Fitch downgrading its credit rating from the “AAA” level, the risk of receiving a symbolic blow at a time when the risk of default on its debts looms in light of the political impasse between the administration of President Joe Biden and the Republican opposition.
However, the potential downgrade would not be unprecedented if achieved. Standard & Poor’s downgraded Washington’s rating in 2011 against the background of the debt ceiling crisis at the time, and it may have limited repercussions on the world’s largest economy in light of the high demand for US Treasury bonds in the markets.
What does an “AAA” rating mean?
AAA is the highest level credit rating agencies award for government and corporate debt.
The three main rating agencies – Standard & Poorzo, Fitch and Moody’s – use a rating system ranging from AAA to D (for default), through B and C.
The ratings are an indication for investors of the entities’ ability to repay their debts. When issuing a credit rating, the agency considers factors including the country’s economic growth rate, debt levels, spending and tax revenues, and political stability.
The lower a country’s rating, the more inclined investors are to get a higher interest rate to buy its debt, in order to compensate for the higher risk.
Which countries have an AAA rating?
A small number of countries have an AAA rating from all three major agencies: Australia, Denmark, Germany, the Netherlands, Norway, Singapore, Switzerland and Luxembourg.
Several other countries have an AAA rating from one or more agencies, such as the United States and Canada, as well as the European Union.
What are the implications of downgrading the AAA rating?
Downgrading to AAA sends a signal to investors, and the impact varies by country and context.
France lost this rating along with many other countries in the aftermath of the 2008 global financial crisis. This drove up borrowing costs, but it did not alienate lenders.
US borrowing costs also rose after Standard & Poorzo’s 2011 decision – but the US has a significant advantage.
In this regard, Fitch Ratings said Thursday when it put the US rating on watch for a possible downgrade: “The US dollar is the world’s pre-eminent reserve currency, and we believe that exchange risks and capital controls are minimal.”
The US currency’s role as the most used in global business may be jeopardized by a default, but in the short term the demand for the dollar could rise as it is considered a haven in a time of global turmoil.
The need to hold dollars for trade purposes means that demand for US bonds will remain, even though Washington may have to pay higher interest rates.
Fitch has said since 2013 that the US credit rating is likely to be downgraded, but it has not yet reduced it.
The United States has been rated by Fitch since 1994 and Moody’s since 1949, and they have never downgraded its credit rating.
