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U.S. Sovereign Ratings Impact: What If Congress Doesn’t Pass Stimulus? – Forbes

The deficit hawks of Congress have reappeared after a period of dormancy, and they’re roosting all over Capitol Hill. Passage of the $2 trillion CARES Act happened without much legislative drama back in March, but negotiations for a second stimulus package have been difficult.

Tea Party Republicans are badgering Senate Majority Leader Mitch McConnell, who kept the price tag of HEALS at $1 trillion. And it was McConnell who called House Speaker Nancy Pelosi’s HEROES Act a “multi-trillion-dollar socialist manifesto.” But it’s not just conservative budget hawks worrying about U.S. deficits: The ratings agencies are watching.

On July 31, Fitch Ratings changed their outlook on the U.S. credit rating to negative, and warned that high fiscal deficits were a threat to the nation’s AAA rating. Fitch’s worries are about more than just the second stimulus package, and extend to the bigger picture of fiscal and monetary policy as a whole.

If a second stimulus deal gets passed, the price tag will be in the trillions. Passage of a deal is not looking likely right now, but whether a deal gets done or not, it’s very likely we’ll see more ratings agency moves on U.S. sovereign ratings. Why does that matter?

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Why Does Fitch’s Outlook on the U.S. Rating Matter?

In its note, Fitch stated that it revised its outlook on U.S. government debt to negative “… to reflect the ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan.”

Fitch warned that the U.S. had the highest government debt of any AAA-rated nation, and that big U.S. deficits were already rising before the onset of the huge economic shock precipitated by the coronavirus.

Sovereign credit ratings attempt to gauge the ability of countries to repay their debts, and lower ratings make it more expensive for them to borrow money.

But the U.S. is different from other countries: Global trade relies almost exclusively on the dollar, and U.S. treasury bonds are the most widely held asset on earth. This status means Fitch’s move would have little impact on the U.S. government’s ability to finance massive deficits in the near term (the longer term is hotly debated).

So why the concern? In a word, confidence. 

Moves by the ratings agencies have knock-on effects on confidence at every level of the U.S. economy. Investors may become more hesitant, companies may pull back on economic activity, and both of these decisions may impact consumers by further weakening wages and employment.

In addition, the credit ratings of U.S. corporations are tied to the U.S. sovereign rating. If the federal government is downgraded, this trickles down by increasing the cost of borrowing for all U.S. companies, with detrimental impacts throughout the economy.

The price of gold rocketed past $2,000 an ounce this week, a new all-time high. Global investors are scurrying for safe-haven assets to brace against the uncertainty, and the breakdown in stimulus negotiations in Congress are only worsening the lack of confidence.

The inability of Congress to get a second stimulus plan passed is symptomatic of its larger inability to help solve the massive economic problems facing the country, from healthcare dysfunction, to income and racial inequality.

“A continuation of policy gridlock is a risk,” Fitch wrote. “Political polarization may weaken institutions and reduces the scope for bipartisan cooperation, hindering attempts to address structural issues (including some highlighted by the pandemic and protests) but also longer-term fiscal challenges.”

Ratings Moves by S&P and Moody’s Are a Risk

Back in the summer of 2011, Fitch also cut it’s outlook on the U.S. to negative when Congressional negotiators were unable to reach a deal on raising the U.S. debt ceiling, which ultimately would limit the government’s ability to borrow money. 

Standard & Poor’s took even more dramatic action that summer, downgrading the U.S. credit rating to AA+ from AAA. This was the first downgrade of the U.S. sovereign rating in history, and remains the only time the U.S. AAA rating has ever been lowered by any of the major crediting ratings agencies.

Congress managed to reach a deal in that political showdown. Fitch revised its outlook back to positive—although S&P’s rating remains AA+. Expect more moves from the ratings agencies, and more tart commentary about the parlous state of the nation’s finances.

What do you think?

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Written by Adam

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