Strange timing from Fitch. US debt to GDP is heading down, the term premium is negative (suggesting strong demand for long-term bonds), and the only likely point of bipartisan consensus in this Congress is to avoid a an avoidable default.
I could see a case for downgrading the US: a) after the Trump tax cuts were passed, cutting into the US revenue base. b) after January 6 (see today’s other news) c) before Congress suspended the debt ceiling (but not after).
And I can see the case for downgrading the US in 2025 if the US reups the Trump tax cuts that are scheduled to then expire (without finding alternative revenue sources) but now, after the debt ceiling was raised?
The fiscal deficit perhaps should be a bit lower in an ideal world (Congress passed on easy opportunities to increase the tax paid by US MNEs and lower US pharma costs … ) but it clearly has come down a lot.
I think more conceptually this downgrade shows the difficulties the rating agencies face “rating” the benchmark issuer in each of the world’s main currency blocks (the Treasury, Japan’s MoF and France’s Tresor — Germany doesn’t supply enough bunds to count.
Presumably Fitch and S&P think that the the dollar benchmark (no credit risk) is now some combination of the World Bank and Apple (which has cash reserves to cover its bonds … and massive profitability).
But that’s kind of strange when you think about it — the Fed (implicitly but clearly after 2020) stands behind the stability of the Treasury market, but it has no mandate to buy WB or Apple bonds .
the US has the legal right to tax Apple’s global profit (even if it has had trouble mustering political consensus to exercise that right) to improve its own solvency.
The World Bank doesn’t use much leverage (it should use more TBH), has a high quality project portfolio and benefits from being a preferred creditor … But it is hard to see how it ultimately can be financially stronger than its biggest shareholders.
Think about the notion of callable capital, and how much of that would be provided by the US, Japan and members of the Euro area that aren’t “Germany” .
Fitch’s timing was off (the downgrade should have come before the debt ceiling was suspended, with an upgrade on passing.
But it also seems to have struggled with the cross country comparison between the US and other countries, which to me suggests flaws in how it thinks about the credit risk from countries that issue benchmark bonds in their own currencies