(Bloomberg) — The rating of US government bonds is based on a centuries-old record of always paying their debts. For now, he’s also hanging on believing in modern political brinkmanship.
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As President Joe Biden negotiates with congressional Republicans on a plan to raise the debt limit and avert an unprecedented default early next month, Wall Street credit rating firms are standing by — assuming that disaster will be averted, even at the eleventh hour. .
William Foster of Moody’s Investors Service, a senior credit officer, said in an interview Wednesday that he was “hearing the right things from Washington,” and that his company has kept the top US rating intact through on-and-off negotiations since then. as well as Fitch ratings.
Even S&P Global Ratings, which drew criticism in 2011 for downgrading the US rating from AAA after a similar brush with default, maintained a stable rating outlook during the recent scuffle, anticipating a deal.
But frequent political disagreements undermine the stability and predictability that are supposed to underpin Washington’s status as the risk-free benchmark in global financial markets.
Priya Misra, global head of interest rate strategy at TD Securities, said, “While we don’t expect S&P to downgrade the US further, Moody’s or Fitch could put the US on a negative outlook or even a negative watch due to further brinkmanship capping.” Debts”. She added that any move “to downgrade the credit rating of the United States or the threat of a downgrade could lead to a broad reaction of risk-off in the market.”
So far, the three major bondmakers have been reluctant to signal any shift in their current guidance because they see the debt ceiling as likely to be raised before the so-called X date when the US Treasury runs out of cash. on Monday, after Treasury Secretary Janet Yellen warned that could happen as soon as June 1.
The debt frontier showdown splits the credit rating of the US downgrade operator
No reviewers have downgraded the US since Standard & Poor’s did in 2011, when a similar predicament prompted it to lower its rating from AAA to AA+, the second-highest score.
This decision angered US officials, who said his analysis was flawed given that the US is the backbone of the global financial system. While Moody’s and Fitch have both made adjustments to the US outlook amid debt-limit episodes, they have not downgraded the core credit rating of the US the way Standard & Poor’s has.
So entrenched was the treasury market’s status as a haven for global markets that even after the S&P downgrade, it soared as investors pulled out of equities fearing the repercussions. For the same reason, only this time around treasury bills due to mature next month saw yields rise due to default risk.
However, the US credit rating is likely to take another hit if Congress cannot reach an agreement in time. And Monday night, House Speaker Kevin McCarthy said he and Biden had a productive meeting even though an agreement remained elusive.
Fitch Ratings said in an April report that increasing partisanship and using debt limit confrontations to advance political agendas is “a recipe for more confrontation, not less, over the US debt limit in the coming years” that could erode confidence in the US and affect its rating. . The company said its US AAA rating would be at risk if the Treasury decided to meet some obligations, including its bonds, but not others — such as payments to certain contractors — after the funds run out.
S&P officials pointed to a statement about the US rating from March, when the company said it expects Congress “will eventually pass debt-ceiling legislation, as it has done in more than 80 previous cases – understanding the dire consequences for financial markets and the US economy.” Do not do it “.
Moody’s Foster said this is also his company’s baseline scenario. But he said the company would downgrade the federal government’s rating by one notch to Aa1 in the event of a bond default, but the standoff was resolved soon after.
“So there could be a missed interest payment that could be a few days late,” he said. “But there will be no loss for investors, and that will be important.”
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