PSA: no one should care about the US credit rating

The “big news” overnight is that Fitch Ratings has put the US’s triple-A credit rating on review for a downgrade, because of — gestures helplessly at the absolute state of US politics-.

Here is the full full rationale, and here is the main bit.

Debt Ceiling Brinkmanship: The Rating Watch Negative reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching x date (when the U.S. Treasury exhausts its cash position and capacity for extraordinary measures without incurring new debt). Fitch still expects a resolution to the debt limit before the x-date. However, we believe risks have risen that the debt limit will not be raised or suspended before the x-date and consequently that the government could begin to miss payments on some of its obligations. The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness.

. . . X-Date Approaching: The failure to reach a deal to raise or suspend the debt limit by the x-date would be a negative signal of the broader governance and willingness of the U.S. to honor its obligations in a timely fashion, which would be unlikely to be consistent with a ‘AAA’ rating, in Fitch’s view. Prioritization of debt securities over other due payments after the x-date would avoid a default. Similarly, avoiding default by non-conventional means such as minting a trillion-dollar coin or invoking the 14th amendment is unlikely to be consistent with a ‘AAA’ rating and could also be subject to legal challenges.

So Fitch thinks the Treasury continuing to prioritise debt payments, attempting the 14th amendment gambit or #MTFC would all still lead to a downgrade.

However — and we cannot stress this enough — no one, absolutely no one, should actually care. This is a complete nothingburger, whatever happens. No one invests in US Treasuries on the back of its credit rating.

Even the hysteria surrounding S&P’s infamous actual downgrade to AA in 2011 — for an example watch this interview with the rating agency’s David Beers — was quickly proven to be comically overdone.

Ratings can affect collateral haircuts, but this is US government debt. It is what people would put up as extra collateral. Unless there is an actual default, nothing will change (and you might be surprised at how little might change even in that Armageddon scenario).

* Yes we know that Fitch uses restricted default (RD) and selective default is S&P’s classification.

Further reading:
— ‘Passing the debt ceiling is like passing a kidney stone’
Democracy Is at Stake in the U.S. Debt Fight.
Do sovereign credit ratings still matter?

This post was originally published on Financial Times

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