Fitch: The U.S. government’s debt fundamentals are fine. Our politics are a mess.

October 15, 2013

USA! USA! (AFP PHOTO / Saul Loebesal Loeb/AFP/Getty Images)

It turns out that if you have a major political party arguing that a government debt default wouldn't be that big a deal, it makes people start to wonder just how creditworthy your government really is.

That's the lesson of the decision late Tuesday by Fitch, one of the three major credit-rating firms, to put the U.S. government on "Ratings Watch Negative" for a possible downgrade of the nation's AAA credit rating. It follows an actual downgrade during the last debt ceiling standoff, in August 2011, by Standard & Poor's. That event sparked a wave of stock and bond market volatility. The Fitch analyst team has not (at this point) downgraded U.S. debt, but it is clearly threatening to do so if Congress does not raise the debt ceiling soon.

The irony in Fitch's statement resides in the pains it takes to point out the soundness of the fundamentals of the U.S. debt picture. "Fitch continues to judge that the U.S. economy (and hence tax base) remains more dynamic and resilient to shocks than its high-grade rating peers," the company's analysts write. "Fiscal and macroeconomic risks emanating from the financial sector are generally low and diminishing and becoming supportive of, rather than a drag on, economic growth."

And deficits have been coming down."The 'AAA' rating also reflects the halving of the federal budget deficit since 2010, which is now approaching a level consistent with debt stabilisation."

In other words, the United States is not facing anything resembling a traditional debt crisis, like those faced by Greece and Argentina in the recent past. This is a different sort of animal, the Fitch analysts strive to make clear -- a scenario in which it is political actors, not economic fundamentals, that are posing a risk to the creditworthiness of the world's largest economy.

At stake, the Fitch analysts argue, is nothing less than the United States' status as the anchor of the global financial system, and even, potentially, its ability to handle debt loads in the future. "The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S.," write the analysts, led by Ed Parker. "This 'faith' is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns."

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Neil Irwin | October 15, 2013