The U.S. is able to issue and support more debt than other AAA-rated sovereign borrowers because of the dollar’s status as the world’s main reserve currency and its diversified economy, Fitch Ratings said.
Fitch’s view of the U.S.’s top credit rating, which it affirmed Aug. 16, rebuts Standard & Poor’s decision on Aug. 5 to downgrade the nation to AA+ from AAA. S&P said lawmakers failed to cut spending enough to reduce record deficits. Moody’s Investors Service affirmed its top U.S. ranking last week.
“Leaving aside arguments about debt dynamics, the U.S.’s relative wealth and productivity, and political will, the U.S. is anything but just another sovereign,” Fitch analysts Jeremy Carter and Alex Griffiths wrote today in a report. “The pre- eminence of the U.S. dollar as the global reserve currency means the U.S. government effectively has first call on excess global savings and supports low real interest rates.”
Since New York-based S&P cut its rating on the U.S., the yield on the Treasury 10-year note has dropped to a record low 1.97 percent. It was 3.33 percent in January and averaged 4.04 percent over the past decade. The security is a benchmark for everything from home mortgages to car loans. Treasuries are on pace in August for the biggest monthly gain since December 2008.
U.S. Has Time
“The dollar’s status as the world’s reserve currency means the sovereign is not exposed to any serious liquidity risk,” London-based Griffiths and Carter wrote. “The lack of liquidity risk gives the U.S. time to resolve its issues -- but it is unquestionable that it needs a credible plan to reduce its debt if it is to retain its AAA rating in the medium term.”
Marketable U.S. government debt outstanding has risen to $9.4 trillion, from $4.34 trillion in mid-2007, as the government borrowed to bail out the nation’s banking system and lift the economy out of recession. The U.S. went from budget surpluses averaging $139.7 billion from 1998 through 2001 to a deficit of $1.29 trillion last year, Bloomberg data show.
The U.S. may be placed on negative outlook, indicating more than a 50 percent probability the nation will be downgraded in the next two years, should weaker-than-estimated growth or a failure by a congressional committee to enact $1.2 trillion in budget cuts under a plan reached this month cause debt levels to rise more than estimated, Fitch said on Aug. 16 in a statement.
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