The U.S. Loses Its AAA Again: What Didn’t Happen Is The Real News

Ann Rutledge
August 24, 2023

The biggest news of all about Fitch’s downgrade of the U.S. credit rating, from AAA to AA+, is what didn’t happen.

Fitch’s rating action was a redux of the S&P downgrade exactly 12 years ago. The two firms define their symbols nearly identically. For Fitch, AAA means the highest credit quality and AA, very high credit quality. For S&P, AAA means the highest rating [we assign] and AA means very strong capacity to meet its financial commitments. Both firms use a plus to indicate that the rating is at the high end of the AA bracket. Both rating actions were with respect to the same class of rating, a long-term government foreign currency Issuer Default Rating, IDR.

But the class of rating deserves more attention, if only to correct a misimpression circulated by a lazy media that the U.S. itself was downgraded. This did not happen. Nationally Recognized Statistical Rating Organizations (NRSROs) do not upgrade or downgrade countries, at least not directly. They rate a borrower’s capacity to repay its debts in accordance with the contract.

The credit intent underlying IDR is to rank the long-term (>one- year) foreign exchange claims-paying ability of the U.S. vis-à-vis other obligors in the global credit markets.

Issuer means the rating is on the borrower—the U.S. government— not on an Issue—a particular series of debt. The U.S. is de facto a foreign currency issuer because its debt is denominated in USD, one of four freely convertible global currencies alongside Euros, Pound Sterling and Japanese Yen.

Although the rating actions are twelve years apart, they express convergent views and take aim at the same risks: weakening governance, difficulties in bridging the gulf between political parties over fiscal policy, failure to come up with a medium-term budgetary plan. Here is the S&P announcement, and here is Fitch’s. Hank Paulson, who served the White House as Treasury Secretary from 2006-2009, prior to the S&P downgrade, echoed these points when he described the debt downgrade as, not an immediate worry but “a very important wake-up call,” and caveating: “longer term, it’s a major concern.”

The day after Fitch’s rating action, Janet Yellen protested the downgrade was “entirely unwarranted” in the face of a strong economy and a “flawed assessment” based on outdated data. Presumably by outdated data she meant that the debt ceiling bill had passed on June 3rd.

But it’s Yellen’s perception itself that may be outdated. People who follow and understand credit rating rituals know the outlook and watch-listing are the real credit action. The multi-step process is designed to give the market and the issuer time to respond. Any subsequent letter-grade change is a mere formality.

On May 23, Fitch had put the US long-term IDR rating on Negative Watch citing these factors: eleventh-hour debt ceiling brinkmanship; deleterious economic and financial impacts if an agreement were not reached; and ongoing governance challenges. Then, on June 2, Fitch had declared its intention to “resolve” the watchlisting (meaning, take a final rating action) in 3rd Quarter, 2023.

In fact, Fitch acted much faster, on August 2—a further indication that Fitch wanted its message heard above the din of denial. Besides Yellen’s words, that denial can also be heard in White House economic adviser Jared Bernstein’s comment that the timing made no sense and the decision was bizarre and arbitrary.

But here is what bizarre and arbitrary credit downgrades actually would look like, on two other classes of rating that Fitch and S&P explicitly left untouched. Either could wreak havoc on a country.