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U.S. Debt Default Could Damage Nation’s Credit Rating

If the US government defaults next week, even for a few hours, it could have long-lasting consequences for the country’s future. The three major rating agencies, S&P Global Ratings, Moody’s and Fitch Ratings, play a big role in how damaging these outcomes are.

With the fiscal fallout from defaulting on debt so severe, officials are hopeful that lawmakers will reach a deal before the government runs out of cash to pay its bills, possibly as early as next month. It may come true. But all three have vowed to lower their ratings on the U.S. as a borrower if the government fails to pay its debts, and even if a deal is reached soon after repaying the debt, they would return the ratings to their previous levels. may become passive. Default.

The United States has never intentionally defaulted on its debts in modern times, but even a short-lived default has changed the perception that the debt ceiling brinkmanship is a political arena, and has made a real impact on government creditworthiness. Moody’s warned that it would turn into a risk.

“Our view is that it needs to be permanently reflected in the ratings,” said William Foster, chief U.S. analyst at the rating agency. The ministry said that if the ministry misses even one interest payment, the ministry’s credit rating will be lowered by one notch. For the U.S. to regain its previous highest credit rating, lawmakers would need to make significant changes to the debt ceiling or eliminate it entirely, Foster said.

Credit ratings range from D or C (for S&P and Moody’s scale) to AAA or Aaa for the soundest borrowers, embedded in financial contracts around the world, and held by pension funds and other investors. It may determine the quality of the debt that can be made. Or a type of asset that acts as collateral to secure a transaction. Ratings also indicate a country’s fiscal health, with countries with lower ratings tending to have higher borrowing costs.

For the U.S., a deadlock in debt limits leading to default “would not be consistent with the highest possible rating,” Foster said. “But if that rule were removed and reformed in such a way that it was no longer a major concern in terms of creating default scenarios, it would potentially trigger a reassessment of the credit profile, and perhaps as a result, it would i will be back.

Although a deal was eventually reached and a default avoided, S&P downgraded the U.S. credit rating by one notch in the 2011 debt limit battle. Since then, authorities have maintained the rating at this slightly lower level of AA+.

“The strongest thing about the 2011 decision was the political situation, that the path to default was very clear, and it continues to be so,” he said at the time, downgrading the government. John Chambers, who was part of the S&P team, said. “The current arguments justify S&P’s decision to downgrade and affirm the rating.”

A similar move by Fitch or Moody’s would drop the U.S. from a small club of the world’s highest-rated bond issuers. (Many investors still consider the U.S. a triple-A because it’s rated by two of the three authorities.) Only 12 countries are rated Aaa by Moody’s, A downgrade would put the U.S. in a category below such as Germany. , Singapore and Canada.

Even without a default, the U.S. position could be undermined. Foster sees Moody’s “outlook” past the so-called X-date (which could be as early as June 1, according to the Treasury Department, when the government runs out of cash to pay all its bills). It said it could be enough to bring it down. country rating. Refers to an opinion on the expected direction of a borrower’s rating.

The United States benefits from its central role in the global economy as the dollar is the dominant currency in global trade and US government debt is the world’s largest debt market. Doubts about the nation’s creditworthiness threaten foreign investors and governments, the major holders of U.S. Treasury bonds, threaten the nation’s ability to finance its finances on the same favorable terms as in the past, and potentially jeopardize its international standing. It may even shake.

“It’s not good for the United States,” Indonesia’s Finance Minister Sri Mulyani Indrawati said at a recent meeting of world financial leaders.

Foster declined to comment on whether he had briefed the U.S. government on Moody’s plans to assess the country’s credit rating amid the ongoing debt ceiling stalemate.

“I cannot speak to discussions with issuers, including governments, but there have been ongoing discussions throughout the year and more frequent discussions depending on what is happening in a particular country at any given time,” he said. There may be negotiations,” he said. said Foster. “We have always had open channels with these governments, including the United States.”

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