Credit raters' warnings on U.S. debt carrying less weight


Fitch Ratings became the last of the big three credit rating agencies to weigh in on the U.S. debt situation, issuing a report that suggests that if the government cannot find a way to raise the statutory debt limit, the agency would have no choice but to seriously reconsider its AAA rating of U.S. debt. This follows a similar move by Moody's, which said last week that a downgrade of U.S. debt is possible if a deal on the debt limit is not reached. Standard & Poor's has issued a similar warning.

The stakes are rising, as the Treasury basically can keep the government funded only through Aug. 2 without having to issue more debt. An interesting development right now is that the words of the credit rating agencies seem to carry less weight than before. While all the news outlets ran with the news, not all in Washington are as concerned about the consequences of a short-term default.

In one view, if the government was to actually default, we would likely see the rating on U.S. debt slashed all the way to junk status. Chaos would reign, and borrowing costs would soar. The administration says a default would be nothing short of a catastrophe. In the past, the views of credit rating agencies' would have been seen as solid support for this view. But not all are according the agencies as much significance at the moment.

Is it because their reputations are still somewhat tarnished from the CDO fiasco and the financial crisis? Or is it mere politics? In the view of some Republicans, a short-term default would be anything but a disaster. Instead, they believe it is exactly what we need to get the overall budget in order. In the view of some this is irresponsible, a way of playing politics.

For more:
- here's an article from Breakingviews

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