As you have no doubt heard, Fitch downgraded US credit to double A plus from triple A. Many reasons have been given for their decision though I think only one is at the core of the downgrade — “the increasing failure of politicians to tackle pressing reforms” and demonstrate a stable process for making long-term country-wide financial decisions. I can’t argue with that . . . the debt ceiling crisis demonstrated that our politicians are disinterested in an orderly financial decision process.
A bit of history to provide perspective on these credit rating companies:
Fitch Ratings Inc., Moody’s, and Standard & Poor’s are the “Big Three” credit rating agencies nationally recognized to evaluate financial products/companies by the Securities and Exchange Commission (SEC) since 1975.
In 2011, the S&P Global Rating was the first to drop US credit to double A. The market mostly ignored this downgrade since this is the same credit rating company that continued to sustain a AAA rating for Lehmann Brothers even as LB filed for bankruptcy. Making matters worse, when the dust settled, this credit agency was found to have benefited from providing high credit ratings to packaged subprime mortgages (i.e., those with no-job, no income) that were then sold to unwary investors.
Moody’s is the remaining credit agency that still believes that the US will pay off its bills and deserves the AAA rating.
Though the remaining countries with triple A credit ratings from all three agencies have stable financial process around debt management many of them have high national debt levels. The countries are Germany, Denmark, Netherlands, Sweden, Norway, Luxemburg, Singapore, and Australia.
What does this downgrade mean? For now, not too much since the US dollar remains the go-to currency and US Treasuries are still considered the risk-free asset to have, particularly during a crisis. Unfortunately, this downgrade does mean that the debt service payments will increase and erode faith in the US dollar.
To resolve this issue, the US needs to deal with long-term fiscal issues in an organized and responsible manner.
What does this mean for your portfolio? Not much in the short-term. It does though remind us to maintain a globally allocated portfolio.
Edi Alvarez, CFP®
BS, BEd, MS