Home > Government & Politics > U.S. Credit Rating Outlook – Is the Third Time a Charm?

U.S. Credit Rating Outlook – Is the Third Time a Charm?

You may have heard the cliché, “The third time is a charm.” When it comes to the future credit rating of the U.S. government, the cliché, “Three strikes and you’re out,” might be more applicable.

Presently, there is a lot of discussion concerning the U.S. debt limit.  After borrowing $14.3 trillion, the U.S. government has reached its limit on how much money it can borrow.  Accounting gimmicks and creative cash flow techniques are allowing the government to continue spending approximately $3 billion each day more than it receives in revenues.  However, the U.S. Treasury is expected to exhaust these measures by early August.  Unless Congress acts before then, the U.S. government will default on some of its obligations.   You can read this article for a discussion on why I doubt this will happen.

A few weeks ago, two major credit ratings agencies, Moody’s Investors Services and Standard & Poor’s provided a negative outlook on U.S. debt.   This doesn’t  mean that they have downgraded the credit rating, but it’s an indication to investors that this is a realistic possibility in the near future.

On Wednesday, Fitch Ratings said it was putting U.S. debt on watch for a credit downgrade later this summer.  This will be the third major credit ratings agency to state their concerns regarding the current debt and deficit situation of the U.S. government.

All three of the agencies have expressed doubt that the U.S. government will default on its debt. The negative outlooks reflect a general lack of confidence in the ability of Congress and the President to reach a meaningful agreement to significantly alter the current trajectory of the debt and deficit spending.

If you follow politics, you probably are not surprised by the current lack of progress and substantial political posturing.  Washington frequently reaches agreement right before a deadline expires, and often enacts a temporary postponement to give itself more time.  Consequently, I don’t think the ratings agencies are really surprised by the current delays.  Instead, I think the negative outlook is driven by their pessimism of our political leaders to make significant changes in fiscal policy.

They realize that raising the debt ceiling is easy.  It’s a simple vote Congress passed many times in recent years.  The real obstacle is reaching an agreement to dramatically reduce the annual deficit, which could come via spending cuts or increasing revenue.

It’s not a charm that a third credit rating agency has a negative outlook on U.S. debt.  It could be viewed positively if it motivates our political leaders to reach an agreement, but based on recent statements and reactions… don’t count on it.  Instead of being a charm, I suspect the recent ratings outlook is more like another strike.

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