Analysis-US downgrade risk still looms despite debt deal

By David Barbuscia

NEW YORK (Reuters) – Although a U.S. debt default has been averted, the possibility of a further credit rating downgrade remains as debt ceiling negotiations at the eleventh hour have become an almost regular feature of recent US history.

The US Senate on Thursday passed bipartisan legislation backed by President Joe Biden that lifts the government debt ceiling to $31.4 trillion, after months of wrangling between Democrats and Republicans.

“The risk of a downgrade is exacerbated any time Congress flirts with the debt ceiling,” said Calvin Norris, portfolio manager and U.S. rates strategist at Aegon Asset Management, who sees another downgrade as still a possibility. risk.

Rating agencies could examine how negotiations around the government’s borrowing limit were handled, in addition to budgetary considerations, analysts said.

There is precedent: in the debt ceiling crisis of 2011, ratings agency Standard & Poor’s stripped the United States of its coveted AAA rating days after Washington narrowly avoided default, citing increased political polarization and insufficient measures to adjust the country’s fiscal outlook.

The economic damage caused by the debt ceiling battles of 2011 and 2013 has had a crippling effect. Without this political uncertainty, by mid-2015 GDP would have increased by $180 billion and there would have been 1.2 million additional jobs, according to a 2021 Moody’s Analytics study. The US Government Accountability Office United said delays in raising the debt ceiling in 2011 increased Treasury borrowing costs by about $1.3 billion that year.

“A second downgrade would be significant, and perhaps even more so than the first downgrade,” said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution.

“A lot of the insight people get from the ratings is the average rating from the three major rating agencies… The one-time downgrade didn’t really affect the change in the average,” Edelberg said, referring to the investment vehicles that are sensitive to ratings.

The three main rating agencies, Fitch, Moody’s and S&P Global Ratings, respectively rate US sovereign debt AAA, AAA and AA+. Rating agency Fitch and other smaller agencies recently placed the US credit rating under review.

William Foster, senior vice president of Moody’s Investors Service, said the bipartisan debt deal met the agency’s expectations for resolution before the so-called X date.

“With the debt limit suspended until January 1, 2025, this will not be a binding constraint on government borrowing for some time; the main drivers of the US sovereign rating return to economic, institutional and fiscal fundamentals,” did he declare.

S&P Global Ratings and Fitch did not immediately respond to requests for comment.


Investors use credit ratings as one of the metrics to assess government and corporate risk profiles. Generally, the lower a borrower’s rating, the higher their financing costs.

A May Moody’s Analytics report said a Treasury debt downgrade would trigger a cascade of credit implications and debt downgrades from many other institutions.

Andy Sparks, head of portfolio management research at MSCI, said another downgrade by a major rating agency could impact investment portfolios that hold the highest-rated securities, but the impact on the Treasury bill market would probably be marginal. “The reality is that it’s hard to find substitutes for Treasuries,” he said.

Olivier d’Assier, head of applied research in APAC at Qontigo, said a downgrade could affect the use of Treasuries as collateral, but he considers it a very low probability.

“When the dust settles, the US sovereign bond market will still be the place to go for extra cash, simply because there isn’t another bucket big enough to hold it,” he said. -he declares.

According to money market fund expert Peter Crane, chairman of Crane Data, a downgrade could push some of the money from treasury funds to government funds or from government funds to blue chip money market funds, which have greater credit exposure.

“But I think anyone would take a single Treasury A on AAA commercial paper,” he added.


After Standard & Poor’s downgrade in 2011, US equities fell and the impact of the downgrade was felt in global stock markets, already in the throes of a financial meltdown in the eurozone. Paradoxically, US Treasuries rose on a flight to equity quality.

During the 2013 debt ceiling crisis, the legislative deadlock did not lead to a rating downgrade, although Fitch placed its rating under review. This standoff resulted in an estimated $38 million and $70 million increase in borrowing costs according to a report by the Government Accountability Office.

“In the minds of some investors, this has become a recurring game…there may be some longer-term stigma effects, but perhaps not as dramatic as we observed in 2011,” he said. said MSCI’s Sparks.

(Reporting by Davide Barbuscia; editing by Megan Davies and Nick Zieminski)

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