US losing Fitch's top AAA credit rating may portend future economic weakness
- Written by Hakan Yilmazkuday, Professor of Economics, Florida International University
Rifts between Republicans and Democrats are making it harder for Congress to pass budgets and get other important work done.
Delpixart/iStock via Getty Images Plus[17]
But if economists and financial analysts deem Treasurys to be growing riskier, then investors may become less interested in buying them. Alternatively, they may demand a higher interest rate in exchange for taking on the risk that the U.S. may default on its debts.
So, however the market reacts, I believe that this downgrade reflects the real deterioration of America’s fiscal standing as well as its ability to safeguard it.
And as economists and financial analysts decide Treasurys are becoming a riskier security to hold – whether because of the size of overall U.S. debt or because political brinkmanship[18] is making a once-unthinkinkable default more likely – then investors may become less interested in buying them. Or, at least, they may demand the U.S. pay them more to take on the risk, resulting in higher borrowing costs for the government.
Ultimately, this means there will be less money for everything else the U.S. might want to spend money on – or the overall debt load will rise even faster.
Limited options
To cover its growing borrowing costs, the federal government has few options – none good.
It can borrow more money, which is seen as riskier – like taking out one loan to pay off another – and could result in an even lower credit rating and a continuous spiral of rising borrowing costs. Or it could hike tax rates or cut spending, both of which have political consequences and could be hard to accomplish given the degree of polarization in Congress[19].
Furthermore, research has shown that higher government debt[20] is generally associated with lower long-term economic growth, which reinforces the problem by reducing revenue and thus requiring more debt.
So, while Fitch’s downgrade doesn’t signal an imminent financial crisis, it does serve as a warning as Congress engages in its fiscal fights – including the one over the budget[21] that will heat up in September.
References^ CC BY-ND (creativecommons.org)^ demoted Uncle Sam from its AAA perch (www.vox.com)^ stalled negotiations over the budget (apnews.com)^ studies the effects of monetary and fiscal policies (scholar.google.com)^ that revenue has rarely covered enough (fiscaldata.treasury.gov)^ owed US$32.6 trillion (fiscaldata.treasury.gov)^ That’s part of the reason (www.fitchratings.com)^ recent efforts by conservatives (theconversation.com)^ downgraded its rating for the U.S. (www.cnn.com)^ similarly blamed governance issues (www.washingtonpost.com)^ no long-term effects on financial markets (www.wsj.com)^ buyers for Treasury bonds (theconversation.com)^ securities are sold in auctions (www.treasurydirect.gov)^ seen as safe (www.investopedia.com)^ Rating agencies like Fitch (www.fitchratings.com)^ fights among lawmakers over raising the debt ceiling (theconversation.com)^ Delpixart/iStock via Getty Images Plus (www.gettyimages.com)^ political brinkmanship (theconversation.com)^ degree of polarization in Congress (www.pewresearch.org)^ research has shown that higher government debt (doi.org)^ one over the budget (apnews.com)
