Fitch U.S. Ratings Downgrade Response

Fitch U.S. Ratings Downgrade Response on 8-21-2023

Standard and Poor’s downgraded US long term rating in 2011. At that time, the writer wrote several responses to challenge the Downgrade. Now the writer wants to respond to Fitch US Downgrade. The freedom of speech encourages the free and open exchange of ideas the truth, sooner or later, would be exposed.

The purpose of bond's credit rating was to reflect the probability of going into default. During the Standard and Poor’s US rating downgrade period, Former Fed Chairman Alan Greenspan said, "This is not an issue of credit rating. The United States can pay any debt it has because it can always print money to do that. There's zero probability of default." At that time, the writer was not aware if there was anyone who had challenged this statement. Here, the key phase is “zero probability of default”. If it is converted to credit rating, the writer believes it should be at least AAA credit rating. Therefore US should have AAA credit rating.

Both the Standard and Poor’s Downgrade and Fitch Downgrade Reports mentioned the “reserve currency “. The Standard and Poor’s Downgrade Report stated: “We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage…” The Fitch Downgrade Report states: “Critically, the U.S. dollar is the world's preeminent reserve currency, which gives the government extraordinary financing flexibility.” U.S currency is a key reserve currency. It means the demand for U.S currency is high. In fact the demand for U.S currency is higher than any countries in the world.

The effect of the key reserve currency factor together with the Former Fed Chairman Alan Greenspan’s printing money factor is similar to a credit line. The credit line is huge and no other countries can match that “huge”. Basically, it is what Former Fed Chairman Alan Greenspan said that paying any debt by printing money. Again, US should have AAA credit rating.

Next, the writer will look at Fitch Downgrade Reports as how it counter argues the Former Fed Chairman Alan Greenspan’s implied AAA credit rating. Below in black color are parts of the Fitch Downgrade Reports which the writer believes that they are related to the counter arguments. The writer's responses or comments are in blue color.

“Erosion of Governance: In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.”

Both the Standard and Poor’s Downgrade and Fitch Downgrade Reports mentioned the “debt ceiling “. The Standard and Poor’s Downgrade Report stated: “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.” Fitch states: “notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025.”

The raise of “debt ceiling” is certainly the main factor. If US didn’t raise the “statutory debt ceiling”, it meant US stopped borrowing and US would be default on debt. Here, it is not talking about just the default on debt; rather it is talking about the “default caused by the self-imposed limit”.

Standard and Poor’s made it as a strong argument in its Downgrade Report. However, this argument involves how politicians behave in their voting decisions and those behaviors and decisions are related to the matter of politics. Frankly, Standard and Poor’s as a financial service company who had no expertise in this area. If it was from certain political talk shows hosts, this argument might have some merit. The same argument applies here as Fitch has no expertise in this area and this Fitch argument has no merit. Did US ever have a “default caused by the self-imposed limit” since Standard and Poor’s Downgrade? NO. Did US ever have a “default caused by the self-imposed limit” since Independent? NO. If it happens once, it can be said there is a probability. If it never happened, it is just a speculation. If Fitch’s Downgrade is based on this factor only, Fitch’s Downgrade is based on speculation.

Anyone can make bet on if the politicians can raise “statutory debt ceiling”. Obviously, Fitch is not a fortune teller and the chance of winning the bet for Fitch is not higher than other people. If Fitch thinks the politicians can’t raise the “statutory debt ceiling” in 2025, Fitch should Downgrade US in 2025, not now. The decision of taking more debt for the nation is not meant to be easy but it doesn’t mean the politicians can’t take care of the issue.

As for the other factors, how significant are they when compared with this raise “debt ceiling” factor? The writer believes that they have little or no weight to counter argue the Former Fed Chairman Alan Greenspan’s implied AAA credit rating. The explanations will be followed.

“Rising General Government Deficits: We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. Additionally, state and local governments are expected to run an overall deficit of 0.6% of GDP this year after running a small surplus of 0.2% of GDP in 2022. Cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook, with cumulative savings of USD1.5 trillion (3.9% of GDP) by 2033 according to the Congressional Budget Office. The near-term impact of the Act is estimated at USD70 billion (0.3% of GDP) in 2024 and USD112 billion (0.4% of GDP) in 2025. Fitch does not expect any further substantive fiscal consolidation measures ahead of the November 2024 elections.

Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025 (in line with the historical 20-year average). The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the 'AA' median and 1% for the 'AAA' median) due to the higher debt level as well as sustained higher interest rates compared with pre-pandemic levels.”

Several economists ask why Fitch downgrades US Now. Obviously, those economists have their own arguments for this question. Fitch states that interest-to-revenue ratio is expected to reach 10% by 2025 and it is a lot worse than even the 2.8% for the 'AA' median. The 1% criterion (for the 'AAA' median) is very tough for US to achieve. With this criterion, Fitch can pretty much choose any particular point of time to downgrades US. Why downgrades US now?

Fitch says: “The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the 'AA' median and 1% for the 'AAA' median) due to the higher debt level as well as sustained higher interest rates compared with pre-pandemic levels.” It is misleading and it just compares with the lower interest rate periods. In late 1990, the 10-year note rate was around seven percent. From the article,The National Debt Is Now More than Ten Times Annual Tax Receipts, the graph plotted is from 1979 to 2020. It showed the federal interest payments to federal tax revenue ratios were always bad. Why is the “10% by 2025” so significant? So why downgrades US now?

Fitch should have downgraded US In late 1990, not now.

This interest-to-revenue ratio may be able to measure the financial health of US. However, it still can’t alter the huge credit line that US has.

“General Government Debt to Rise: Lower deficits and high nominal GDP growth reduced the debt-to-GDP ratio over the last two years from the pandemic high of 122.3% in 2020; however, at 112.9% this year it is still well above the pre-pandemic 2019 level of 100.1%. The GG debt-to-GDP ratio is projected to rise over the forecast period, reaching 118.4% by 2025. The debt ratio is over two-and-a-half times higher than the 'AAA' median of 39.3% of GDP and 'AA' median of 44.7% of GDP. Fitch's longer-term projections forecast additional debt/GDP rises, increasing the vulnerability of the U.S. fiscal position to future economic shocks.”

Standard and Poor’s downgraded US long term rating in 2011. The Downgraded report projected the debt to GDP ratio to 74% by the end of 2011. The 74% ratio was even higher than the Fitch’s 'AA' median of 44.7% of GDP quite a bit. Why didn’t Fitch downgrade US in 2011 or a few years later? Why now?

US are bad at its debt to GDP ratio and interest-to-revenue ratio. With these chosen factors, Fitch can downgrade US any time Fitch likes. Yet, if Fitch can downgrade US any time Fitch likes with these factors, how relevant these factors can reflex the US probability of going into default? Remember that US are not just bad but very bad at those ratios when compared with 'AAA' median standard. The writer believes that it implies that these factors have little or no weight toward Fitch rating.

“Ratings Downgrade: The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”

The Fitch Downgrade Report does show Fitch included factors other than the raise “debt ceiling” for its US Downgrade. By including those factors, the writer believes that the Fitch US rating is to measure the financial health of US. The Fitch AA+ rating is a financial health rating for US and it may reflex that there are sick elements in US financial health. However, it is not a credit rating and it certainly doesn’t reflex the US probability of going into default.

As for Former Fed Chairman Alan Greenspan’s implied AAA credit rating, Fitch was fail to counter argue the huge credit line that US has and its ability to uses its credit line to pay any debts that it owed. US should have AAA credit rating.

Response on 8-21-2023

Sources:

Fitch Downgrades the United States' Long-Term Ratings to 'AA+' from 'AAA'; Outlook Stable

No Chance of Default, US Can Print Money: Greenspan

The National Debt Is Now More than Ten Times Annual Tax Receipts

Standard & Poor’s U.S. Downgrade response on 8-26-2011