#500
Make America AAA Again
Published:
Aug 07, 2023
Author:
Sarah Parsons Wolter
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This week, Fitch Ratings downgraded the US debt rating from AAA (top-notch) to AA+, citing concerns around the government’s ability to work through debt burdens - exemplified through last month’s debt ceiling standoff in Congress. The last time a similar event occurred was in 2011 when S&P downgraded the US sovereign debt rating, and the S&P 500 lost 15% of its value within a month.
Debt ratings are critical to bond markets and broad investor confidence, although equity market reactions were much more muted this week in reaction to Fitch. Different parties reacted variably, however: Blackstone CEO Steve Schwartzman commented that he felt the rating downgrade was justified given debt statistics, while Treasury Secretary Janet Yellen called it unwarranted. Investment banks including Goldman Sachs and JP Morgan were both of the view that the downgrade itself will have little impact.
The global bond market is one of the biggest financial markets in the world, and was worth ~$141t at the end of 2022. Outside of the downgrade, this market also faces other challenges including shadow banking, which limits the ability of banks to control cost of credit, as well as rising inflation and interest rates. Sounds like there’s a laundry list of things to be fixed before America makes AAA again.
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Make America AAA Again
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