The United States, facing a looming government shutdown unless a spending bill is passed before the October 1 deadline, is in a more precarious position today than it was during the 2011 sovereign credit rating downgrade by S&P, according to John Chambers, former Chairman of the Sovereign Rating Committee at S&P Global Ratings.
As the nation grapples with political divisions and fiscal challenges, concerns about its creditworthiness are resurfacing, reminiscent of the circumstances that led to the controversial downgrade in 2011.
Impending Government Shutdown Threatens United States Credit
The possibility of a government shutdown has returned to the forefront of U.S. fiscal concerns. House Speaker Kevin McCarthy faces a delicate balancing act, with limited room for dissent within his Republican caucus. A group of hard-right members is pressing for deeper cuts in domestic spending, potentially jeopardizing crucial legislative efforts.
Ratings Agencies Sound Alarm Bells
Moody’s recent warning highlighted the detrimental impact a government shutdown could have on the country’s credit. Fitch Ratings had already downgraded the U.S. sovereign credit rating by one notch in August due to political clashes over raising the debt ceiling, a move signaling growing apprehensions within the financial sector.
Echoes of the 2011 Downgrade
In 2011, S&P controversially downgraded the U.S. sovereign credit rating from AAA to AA+, citing political polarization and gridlock during a debt ceiling crisis. John Chambers, who chaired the Sovereign Rating Committee at S&P at the time, commented that the current situation bears striking similarities to the events of 2011.
Deteriorating Fiscal Metrics
Chambers pointed to the nation’s fiscal metrics as a cause for concern. He noted that the government deficit, encompassing both federal and local governments, now exceeds 7% of GDP, with government debt standing at 120% of GDP. These figures surpass previous projections and reflect a weakening fiscal position, casting a shadow over the nation’s economic stability.
Governance and Political Discord
The former S&P chairman highlighted the erosion of governance and heightened political divisiveness as pivotal factors. He expressed that the U.S. is grappling with a more contentious political landscape today, which has led to government shutdowns, concerns about debt default due to the debt ceiling, and even a failed coup attempt in January 2021.
Path Forward Amid Political Gridlock
House Speaker McCarthy faces a challenging task in garnering support from Republican colleagues while contending with the Freedom Caucus’s demands for more significant domestic spending reductions. The possibility of seeking Democratic support to avert a shutdown looms, but it could provoke resistance from hard-line Republicans, possibly even leading to McCarthy’s removal as speaker.
Historical Debt Ceiling Standoffs
The U.S. has a history of intense confrontations over raising the debt limit. In May of this year, the nation teetered on the brink of defaulting on its bills before a last-minute deal between President Joe Biden and McCarthy averted a crisis.
Fitch Downgrade Sparks Debate
Fitch’s August downgrade, citing “expected fiscal deterioration” and governance erosion, stirred discussions among financial experts. While the downgrade raised concerns, some prominent figures in the banking and economic sectors regarded it as having limited material impact.
The U.S. finds itself at a crossroads, confronting familiar fiscal challenges and political divisions that threaten its creditworthiness, echoing a critical moment in its history that culminated in a significant credit rating downgrade.