America’s Sovereign Debt Risks Losing its AA+ S&P Credit Rating
Financial ratings agency Standard & Poor’s Financial Services LLC (S&P) says that the United States can keep its AA+ rating only if it manages to avoid a default, if the debt ceiling deadline is crossed. The implication is that America could lose its high rating if it fails to make its payments in time—a fear that’s growing as we approach the mid-October debt ceiling deadline.
The United States is almost reaching the maximum limit mandated by the federal government to issue new debt—currently set at about $19.9 trillion. Markets are fearful that, once the country crosses this limit, the government will no longer have enough money to service its debt repayments.
Although Treasury Secretary Steven Mnuchin has assured the public that the government plans to raise the debt ceiling, the delay is nonetheless making investors jittery.
Investor confidence in the government appears shaky when we look at the yields of U.S. Treasuries maturing in October—the same month of the debt ceiling deadline. Yields of October Treasury bills have jumped as investors sell these securities in fear that they may not receive timely payments on their investments.
Prior to Standard & Poor’s announcement, ratings agency Fitch Ratings, Inc. also warned that America may lose its AAA rating. While S&P awards U.S. debt the second-highest rating, AA+, Fitch rates it at the highest investment grade, AAA.
Fitch said last week that investor confidence in U.S. Treasuries will be significantly hurt if America defaults on its debt. The agency warned that it may have to strip the country of its “safe investment” status if the debt ceiling is not raised in time.
Markets are now looking to the U.S. government to solve this crisis in a timely fashion in order to restore confidence. However, policymakers have already got their plates full, as they concurrently evaluate their next fiscal policy move, which needs to be addressed in the coming weeks.
Nonetheless, Robert Sifon-Arevalo, a managing director in S&P’s sovereign debt rating group, hopes that the government will “take necessary measures to avoid default,” if it fails to raise the debt ceiling in time.
“S&P sees U.S. keeping AA+ rating if it avoids default,” Business Insider, August 29, 2017.