In what has become a perennial exercise before every debt-ceiling showdown since at least Obama’s first term (when S&P did the unthinkable and cut the US’s coveted AAA credit rating, exposing itself to extensive abuse by Tim Geithner), ratings agencies are starting to beat the credit-rating downgrade drum, with Fitch getting a jump on the competition Wednesday when its head of sovereign ratings warned that an enduring shutdown battle could negatively impact the negotiations over the debt ceiling, which could prompt Fitch to join S&P in eliminating its AAA rating for the US.
During an interview with CNBC and a separate appearance in London (where his comments were recorded by Reuters), Fitch’s global head of sovereign ratings James McCormack warned of a possible cut to its AAA rating for the U.S. sovereign should the shutdown continue to March, noting that the shutdown and debt ceiling battle are adding to anxieties triggered by President Trump’s tax cuts and spending hikes, which have blown out the budget deficit and led to a “meaningful fiscal deterioration.”
“I think people are looking at the CBO (Congressional Budget Office) numbers. If people take the time to look at that 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,” James McCormack, Fitch’s global head of sovereign ratings told CNBC’s “Squawk Box Europe” on Wednesday.
“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. So there is a meaningful fiscal deterioration there, going on the United States.”
Watch his interview with CNBC below:
McCormack added later that Fitch would need to seriously consider a cut if the shutdown continues: “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.”
“From a rating point of view it is the debt ceiling that is problematic.”
A partial shutdown affecting roughly one-quarter of the federal government, and which has delayed paychecks for 400,000 workers while another 400,000 have been furloughed as Republicans and Democrats battle over funding for President Trump’s border wall.
The last ratings agency to cut its credit rating for the US was S&P, which famously revoked the US’s coveted long-term AAA credit rating back in 2011, citing political risks and a rising debt burden in the wake of the financial crisis. Here’s what they said at the time:
We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
We have also removed both the short- and long-term ratings from CreditWatch negative.
The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
The last ratings agency to warn of a sovereign credit rating cut was Moody’s, which warned back in January 2018 that the Trump tax cuts were a “credit negative” because they would add $1.5 trillion to the federal budget deficit over 10 years.