MOLINE, Ill. — For investors around the world, America’s debt has long been considered the world’s most safe and secure form of investment. The principal and interest payments on US Treasury bonds, notes and bills are guaranteed and are backed by the full faith and credit of the US government.
But on Tuesday, American credit-rating agency Fitch stunned Wall Street when it announced it had lowered America’s credit rating. Fitch downgraded America’s credit rating from the highest possible AAA (pronounced “triple A”) rating to AA+ (pronounced “AA Plus"), the second highest rating.
Mark Grywacheski from the Quad Cities Investment Group met with News 8's Devin Brooks to discuss the significance of this move.
Brooks: First off, what is a credit rating and why is it so important to investors?
Grywacheski: Government entities (the federal government, cities, counties and states) as well as corporations issue bonds to generate money to help fund their day-to-day operations. A bond is like a loan. The investor loans the government entity or corporation, say $10K, and in return, the investor receives interest payments.
Much like an individual’s credit score, the credit rating for governments and corporations is based on their financial health and the perceived ability to repay their debts. The higher the credit rating, the more safe and secure that bond is deemed for investors. The lower the credit rating, the greater the risk that a government entity or corporation is unable to repay some/all of that $10K it borrowed from the investor. So, in return for this higher risk, that government entity or corporation will be forced to pay a higher rate of interest to investors.
Brooks: Why did Fitch decide to lower America’s credit rating?
Grywacheski: There are 3 main credit-rating agencies that assess the credit-worthiness of government and corporate debt:
- Moody’s: Still has America’s credit rating at the highest possible AAA rating.
- S&P: Back in 2011, S&P was the first to lower America’s credit rating from AAA to AA+. One of the main reasons was that the Republicans in Congress and the-President Obama couldn’t come to an agreement on raising the amount of debt the government was allowed to take on as well as disagreements on the amount of government spending. That disagreement almost resulted in the US government defaulting on some of its debt.
- Fitch: This past June, we saw something very similar. It wasn’t until the moment near default that Congressional Republicans and President Biden finally came to an agreement on the amount of debt and government spending.
Fitch cites the future uncertainty of similar events where the government can be once again brought to the brink of defaulting on its debt because of this intense polarization between Republicans and Democrats. But Fitch also points out that America’s debt is too high, that government spending is too high all while the economy is likely to go into recession.
Brooks: What is the fallout from this downgrade? Will the US now have to pay a higher interest rate to investors?
Grywacheski: Apart from the very bad optics of America having its credit rating downgraded from AAA to AA+, there isn’t expected to be much collateral damage.
First, AA+ is still the 2nd highest credit rating that can be issued.
Second, as we saw when S&P issued a similar downgrade back in 2011, investors around the world still view America’s debt as one of the safest and most secure forms of investments.
Quad Cities Investment Group is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Quad Cities Investment Group and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Quad Cities Investment Group unless a client service agreement is in place.