MacroScope

Market ducks another shock as Fitch affirms U.S. AAA rating

U.S. stocks are already down about 1% today, so it’s hard to imagine what might have happened if Fitch had decided to follow Standard & Poor’s lead and cut the country’s prized AAA credit rating. Instead, the firm affirmed the U.S. credit rating and gave it a stable outlook. What follows is the full press release that accompanied Fitch’s decision:

Fitch Ratings has affirmed the United States (US) Long-term foreign and local currency Issuer Default Ratings (IDRs) and Fitch-rated US Treasury security ratings at ‘AAA’. Fitch has simultaneously affirmed the US Country Ceiling at ‘AAA’ and the Short-term foreign currency rating at ‘F1+’. The Outlook on the Long-term ratings is Stable.

The affirmation of the US ‘AAA’ sovereign rating reflects the fact that the key pillars of US’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks’.

Fitch will review its fiscal projections in light of the outcome of the deliberations of the Joint Select committee (due by end November) as well as its near and medium-term economic outlook for the US by the end of the year. An upward revision to Fitch’s medium to long-term projections for public debt either as a result of weaker than expected economic recovery or the failure of the Joint Select Committee to reach agreement on at least USD1.2trn of deficit-reduction measures would likely result in negative rating action. The rating action would most likely be a revision of the rating Outlook to Negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade.

US sovereign liabilities, both the dollar and Treasury securities, remain the global benchmark and accordingly the US credit profile benefits from unparalleled financing flexibility and enhanced debt tolerance, even relative to other large ‘AAA’-rated sovereigns. The US dollar’s status as the pre-eminent global reserve currency and depth of the US Treasury market render financing risks minimal and underpin a low cost of fiscal funding.

Wall St. downplays downgrade. Will markets listen?

Reporting for this post was done by the U.S. markets team in New York.

A number of Wall Street analysts have reacted to the historic downgrade of the U.S. AAA rating on Friday evening with a shrug. Some argue the ratings firm’s warnings about the U.S. debt deal offered an early signal, while others dismissed the action, questioning the company’s record of giving AAA ratings to housing assets that turned out to be toxic.

Vassili Serbriakov, currency strategist at Wells Fargo in New York, said:

It’s not entirely unexpected. I believe it has already been partly priced into the dollar. We expect some further pressure on the U.S. dollar, but a sharp sell-off is in our view unlikely.

Paul Dales, chief U.S. economist at Capital Economics in Toronto:

I don’t think it will mean too much to be honest. There will probably be an initial market wobble — FX markets might struggle and Treasury yields might fall a bit. The bigger picture is really that the world is not much different.

Historic downgrade: U.S. loses AAA

Standard & Poor’s on Friday downgraded the United States’ prized credit rating, a move that is likely to compound recent instability in financial markets. Here is S&P’s statement explaining the decision:

United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative

We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

U.S. downgrade could arrive as a whimper

A potential downgrade of U.S. Treasury debt by a credit ratings agency, once seen as impossible for the world’s largest economy, could resound in financial markets more with a whimper than a bang. That’s because, as was evident in a Reuters poll, investors have largely come to expect it.

That Standard & Poor’s ratings agency will cut the U.S. debt rating from AAA to AA+ is “the market’s base case at the moment,” said Krishna Memani, fixed-income director at OppenheimerFunds, with $188 billion in assets under management.

The market does not expect a significant, long-term deficit reduction plan that would keep S&P from cutting the U.S. debt rating.