Elliot Hentov, State Street Global Advisors’ head of macro policy research, argues that growing political unrest means it’s unlikely that the U.S. will retrieve its AAA rating with Fitch in the foreseeable future.
Global stock markets experienced a sharp decline when Fitch, the rating agency, decreased the United States’ long-term foreign-currency issuer default rating from AAA to AA+. This downgrade was attributed to “anticipated fiscal deterioration over the forthcoming three years” and an undermining of governance due to “continuous political showdowns over the debt limit and eleventh-hour resolutions.”
Despite some renowned bank executives and economists minimizing the significance of the decision, Hentov concurred that it wasn’t a significant change.
“Ratings serve as a slow-moving indicator,” he remarked on CNBC’s “Squawk Box Europe” on Thursday.
He added, “One doesn’t have to be a sovereign and analytics expert to realize that the U.S.’s fiscal situation is considerably worse than before. The governance handling public debt is also deteriorating, and honestly, it isn’t on par with other AAA-rated countries.”
Hentov was part of the Standard & Poor’s group that notably downgraded the U.S. government’s credit rating in 2011, triggered by political division following a lengthy and contentious debate in Washington about increasing the debt ceiling.
Another deadlock emerged this May when the U.S., the world’s largest economy, was brought to the edge of default on its bills due to a dispute between the White House and opposing Republicans about raising the debt limit. President Joe Biden and House Speaker Kevin McCarthy eventually reached a last-minute agreement.
When questioned whether the U.S. could regain its AAA Fitch rating soon, Hentov responded with a “no.”
The only plausible way, he indicated, would be if U.S. politics evolved towards a significantly more stable, predictable course.
Deutsche Bank’s head of global economics and thematic research, Jim Reid, pointed out that, despite the resemblance of the debt ceiling quarrels, the S&P downgrade in August 2011 occurred in a markedly different political context.
Reid explained, “The simultaneous occurrence of the debt ceiling conflict and downgrade was unique. The shock was significantly more severe when S&P first downgraded the U.S. from AAA, compared to a second agency doing it 12 years later.”
He also mentioned in a Wednesday email that the Federal Reserve has been reducing rates and committed during its August policy meeting to maintaining these rates at a “shallow level until at least mid-2023.”
The downgrade by Fitch mirrors the fiscal and political challenges faced by the United States, as noted by both Hentov and Reid. The country’s rating, once solidly at AAA, now stands at a precarious AA+, illustrating an unprecedented shift in the nation’s fiscal profile. While there’s hope for recovery, this may hinge on political stability and a more predictable path in the future. However, for now, the consensus among experts appears that the U.S. will not regain its AAA rating in the foreseeable future.
