It’s very risky for an American credit ratings agency to downgrade the US Government.
Standard & Poor’s found out when it stripped the US off its AAA rating in 2011 over the debt-ceiling charade. The Department of Justice then sued S&P over its role in the financial crisis, i.e. for slapping AAA-ratings on toxic securities to pocket fatter fees from issuers. But the other ratings agencies did the same thing and have not been hounded. So S&P claimed that the ‘impermissibly selective, punitive and meritless’ lawsuit was ‘in retaliation’ for the downgrade.
Though the Government denied the retaliation angle, it was a lesson no credit ratings agency within the long and sinewy arm of the Government would ever forget. But now Fitch is inching gingerly toward that abyss. While it affirmed (text) the US at AAA, Outlook Stable, it threw in some potentially devastating caveats.
What drives America’s dubious AAA-rating? ‘Unparalleled financing flexibility as the issuer of the world’s pre-eminent reserve currency….’
So endowed, ‘the US rating can tolerate a higher level of public debt than other ‘AAA’ sovereigns.’ The ‘threshold’ for the US is a gross national debt of 110% of GDP, the highest threshold of any country ‘owing to its exceptional financing flexibility.’ But if the US hits that 110%, it would be ‘incompatible with ‘AAA.”
Other factors also contribute to that ‘exceptional financing flexibility,’ including America’s vast and liquid capital markets, its ‘large, rich, and diverse’ economy, ‘one of the most productive, dynamic, and technologically advanced in the world.’ Nevertheless, growth in that miracle economy in 2014 is going to be a ‘sluggish’ 2%, just above stall speed. And Fitch sees the medium-term growth potential at a languid 2.2%.
This post was published at Wolf Street by Wolf Richter ‘ September 22, 2014.
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