‘The probability of a downgrade now sits at more than 50%—even if a debt ceiling agreement is reached.’
While the United States anxiously awaits a breakthrough on the debt-ceiling impasse, a more likely—albeit less damaging—scenario is also sparking worry: Will the lack of absolute certainty that the U.S. government will avoid a default cause the federal government’s credit rating to be downgraded?
According to former Merrill Lynch Chief Investment Strategist Richard Bernstein, the probability of a downgrade now sits at more than 50%—even if a debt ceiling agreement is reached before the looming deadline. Bernstein says a downgrade, which would prompt investors to demand more interest to hold U.S. debt, would be “very disconcerting.”
Why a downgrade could be painful. As Politico notes: “If it gets more expensive for the federal government to borrow, it gets more expensive for everyone to borrow. Treasuries are used to price everything from consumer borrowing products like credit cards and residential mortgages to municipal debt.”
Has damage already been done? Treasury Secretary Janet Yellen recently warned a downgrade could lead to “a weakening of consumer confidence,” adding that “we are already seeing spikes in interest rates for debt due around the date that the debt limit may bind. There is no good reason to generate a crisis of our own making.”
Delays in a debt-ceiling deal also make the prospects of a recession more likely, analysts worry.
The last—and only—time the U.S. saw its credit downgraded was in 2011, after an agreement was reached to end that year’s debt-ceiling drama. Standard & Poor’s changed the country’s rating from AAA (outstanding) to AA+ (excellent). But interest rates were low at that time, near 0%, lessening the impact somewhat. That is not the case this time around.
Fitch Ratings has been warning of a possible downgrade for months. “If the market reaction is to call into question the role of the dollar in the future as the world’s reserve currency and the Treasury market as the world’s risk-free asset, then absolutely we could [downgrade],” James McCormack, Fitch’s global head of sovereign ratings, told CNN back in March.