U.S. Credit Rating Warning Could Signal Higher Interest Rates

by Ike Obudulu Posted on January 9th, 2019

Fitch, a major credit rating agency, is warning that it will reconsider the nation’s AAA rating if the partial U.S. government shutdown continues into March and raises doubts about the ability of Congress to lift the debt ceiling.

A downgrade of the nation’s pristine credit rating could lead to higher borrowing costs for the U.S. Treasury, companies and consumers.

A number of government agencies have not been funded since Dec. 21 amid President Trump’s insistence that Congress provide $5.7 billion for a wall along the border with Mexico.

With a total debt of nearly $22 trillion and rising, the government’s borrowing limit must be periodically raised by Congress. The next time is in March, although the Treasury could extend that deadline by taking “extraordinary measures” (juggling its books).

Fitch, one of three major credit rating agencies, warned Wednesday that uncertainty created by the 2 1/2-week shutdown could lead to doubts about whether lawmakers will be able to agree on raising the debt ceiling.

“If this shutdown continues to March 1 and the debt ceiling becomes a problem several months later, we may need to start thinking about the policy framework, the inability to pass a budget … and whether all of that is consistent with triple-A,” James McCormack, Fitch’s global head of sovereign ratings, said in London, according to Reuters. “From a rating point of view it is the debt ceiling that is problematic,” he added.

The only previous downgrade for the U.S. government occurred in 2011, when Standard & Poor’s lowered its long-term credit rating to AA-plus. S&P cited the government’s inability to get its fiscal house in order.

In an interview on Wednesday, McCormack said that with projected deficits continuing, “you can see debt levels moving higher, you can see the interest burden in the U.S. government moving decidedly higher over the next decade.

“So there needs to be some kind of fiscal adjustment to offset that or the deficit itself moves higher and you’re essentially borrowing money to pay interest on the debt,” he said. “So there is a meaningful fiscal deterioration going on in the United States.”

In a statement last Friday, Fitch said it sees only a remote chance that the debt ceiling won’t be raised, resulting in a rare default on the federal debt. But the agency warned that the nation’s AAA credit rating would be at risk if there’s “evidence of greater dysfunction in fiscal policymaking.”

When they took over the House last week, Democratic leaders said they will revive the “Gephardt Rule,” introduced in the late 1970s by Rep. Dick Gephardt, D-Mo., that automatically raises the nation’s borrowing limit once the House passes a budget.

Failure to raise the ceiling means “that the government won’t borrow more to pay its bills — but it will still have those bills. This is money that is set to be spent anyway — paychecks, benefit checks, outlays to contractors. Those obligations don’t go away if Congress doesn’t raise the debt ceiling.”

Image: A downgrade in the nation’s credit rating could lead to higher borrowing costs for the U.S. Treasury, companies and consumers.

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Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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