The U.S. Downgrade Is Serious, But Not For The Reasons You Think

Fitch Ratings, one of the leading rating agencies in the U.S. alongside Moody’s and Standard & Poor’s, just downgraded the U.S. from the top-tier AAA qualification to AA+, one notch below. This decision came after a three-month period of “negative watch” and was based on concerns related to recurring spending stand-offs, a gradual “erosion of governance,” and an increasing debt burden. Undoubtedly, these reasons hold true, as the congressional circus has focused on scoring political points and stoking cultural grievances that are irrelevant to economic management.

But what does this lower rating truly indicate? A rating’s primary purpose is to assess the likelihood of a debtor defaulting on its debt. But according to Fitch, no sovereign rated above A+ (which is three notches below AA+) has defaulted since 1995. Standard & Poor’s reports a similar track record going back to 1993. And although the U.S. Federal Government faces a higher interest rate burden due to mounting debt and rising interest rates, it remains well below the levels seen between 1982 and 1999, when the U.S. had a AAA credit rating and the stock market went up tenfold.