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The lack of congressional hawks reappeared after a period of dormancy, and they roared all over Capitol Hill. Continuation of the $ 2 trillion CARES Act happened without much legislative drama back in March, but negotiations for a second incentive package have been difficult.
Tea Party Republicans are slashing Senate Majority Leader Mitch McConnell, who is holding HEALS ‘$ 1 trillion price tag. And it was McConnell who called House Speaker Nancy Pelosi the HEROES Act a “social-multistillary dollar manifesto.” But it’s not just conservative budget hawks who are worried about U.S. deficits: The rating agencies are watching.
On July 31, Fitch Ratings changed its outlook on the U.S. credit rating to negative, warning that high fiscal deficits posed a threat to the nation’s AAA rating. Fitch’s concerns go beyond just the second incentive package, and extend to the larger picture of fiscal and monetary policy as a whole.
If a second incentive action is passed, the price tag will be in the trillions. Continuing a deal is not likely to look right now, but whether a deal is done or not, it is very likely that we will see more review agencies on U.S. sovereign ratings. Why does that matter?
Why does Fitch’s Outlook on the US Rating Matter?
In its note, Fitch stated that it revised its view of the US government debt to negative “… to reflect the continuing decline in US public finances and the lack of a credible fiscal consolidation plan.”
Fitch warned that the U.S. had the highest government debt of any AAA-rated nation, and that large U.S. deficits were already increasing before the onset of the enormous economic shock precipitated by the coronavirus.
Sovereign credit ratings try to measure countries’ ability to repay their debts, and lower ratings make it more expensive for them to borrow money.
But the US is different from other countries: Global trade is almost exclusively dependent on the dollar, and US treasury bonds are the most held asset on earth. This status means that the Fitch movement does not have much impact on the ability of the US government to finance massive deficits in the long term (the longer term is hotly debated).
So why the concern? In a word, trust.
Movements by rating agencies have knock-on effects on confidence at every level of the U.S. economy. Investors may become more hesitant, companies may withdraw economic activity, and both of these decisions may affect consumers by further reducing wages and employment.
In addition, the credit values of US corporations are tied to the US sovereign rating. If the federal government is downgraded, it trickles down by increasing the cost of borrowing for all U.S. companies, with detrimental impact on the entire economy.
The price of gold hit $ 2,000 an ounce last week, a new high. Global investors are scrambling for safe haven capabilities to counteract the uncertainty, and the division into stimulus negotiations in Congress only exacerbates the lack of confidence.
The inability of Congress to obtain a second incentive plan is symptomatic of its greater inability to help solve the country’s massive economic problems, from dysfunction in health care, to income and racial inequality.
“A continuation of gridlock for policy is a risk,” Fitch wrote. “Political polarization can weaken institutions and reduce the scope for bipartisan cooperation, and seek to address structural issues (including some highlighted by the pandemic and protests), but also fiscal in the longer term. Challenges.”
Ratings moved by S&P and Moody’s are a risk
Back in the summer of 2011, Fitch also cut the US outlook to negative when congressional negotiators could not reach a deal on raising the U.S. debt ceiling, ultimately undermining the government’s ability to raise money lending would be limited.
Standard & Poor’s took even more dramatic action this summer, downgrading the U.S. credit rating to AA + from AAA. This was the first downgrade of the U.S. sovereign rating in history, and remains the only time the U.S. AAA rating has ever been downgraded by one of the major rating agencies.
Congress managed to reach a deal in that political showdown. Fitch revised its outlook back to positive – although S & P’s rating remains AA +. Expect more movements from the review agencies, and more tart commentary on the press state of the nation’s finances.
