A Fitch Downgrade Wouldn’t Matter

(Originally published here.)

Fitch, the ratings company, just said that it placed the U.S. government on “rating watch negative” meaning it might reduce the country’s AAA credit grade. It worries that the Treasury may not be able to make all of its debt payments on time without raising the debt ceiling, now being held up by a congressional stalemate. It also worries — wrongly — that “prolonged negotiations over raising the debt ceiling” would endanger “confidence in the role of the U.S. dollar as the preeminent global reserve currency,” which is supposedly “a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.” Fitch might be right about the risks, but its decision to downgrade (or not!) shouldn’t have much of an impact.

I’m reminded of an amusing Bloomberg News article from late last year, which found that changes in sovereign credit ratings had basically no impact on sovereign borrowing costs. Markets moved as if ratings changes mattered a little less than half the time and moved in the opposite direction of the ratings change the other half. When S&P downgraded the U.S. government in 2011, borrowing costs plunged. More recently, there is the case of Japan, which Fitch downgraded last May. Sovereign borrowing costs have been lower ever since.

Japan 10-Year Yield. Source: Bloomberg

Japan 10-Year Yield. Source: Bloomberg

So although there may be plenty of hand-wringing if Fitch follows through and lowers the U.S. government to AA+, it is no reason to panic. You should be more concerned about the possibility that the government defaults on its debt.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)



About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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