According to Elliot Hentov, head of macro policy research at State Street Global Advisors, the U.S. is unlikely to reclaim its AAA rating with Fitch in the foreseeable future due to increasing political instability. Following the downgrade of the United States’ long-term foreign currency issuer default rating from AAA to AA+ by ratings agency Fitch, global stock markets experienced a significant decline on Wednesday.
The downgrade was attributed to “expected fiscal deterioration over the next three years” and concerns about governance due to repeated debt-limit political standoffs and last-minute resolutions.
Prominent bank executives and economists brushed off the decision, stating that it is of little consequence. Hentov also concurred, expressing that he did not consider it a significant development.
On Thursday, “Squawk Box Europe,” explained that ratings act as gradual indicators. According to Hentov, it doesn’t require exceptional expertise in sovereign affairs to realize that the U.S. fiscal profile has worsened, governance over public debt has deteriorated, and it no longer compares favorably to other AAA-rated countries.
Hentov was also involved in the Standard & Poor’s team that gained fame for downgrading the U.S. government’s credit rating in 2011. The downgrade was attributed to political polarization following a prolonged and tense dispute in Washington over raising the debt ceiling.
Experts and Warren Buffett’s Response
In May of this year, a fresh confrontation between the White House and opposition Republicans emerged, centering around raising the U.S. debt limit. This situation brought the world’s largest economy perilously close to defaulting on its obligations until President Joe Biden and House Speaker Kevin McCarthy managed to reach a last-minute agreement.
When asked whether the U.S. could expect to reclaim its “risk-free” AAA rating from Fitch in the near future, Hentov provided a straightforward response, saying, “No.”
“The concise response is that it’s unlikely, unless there’s a significant shift towards a more stable and predictable path in U.S. politics,” stated Jim Reid, head of global economics and thematic research at Deutsche Bank. He pointed out that although there are similarities with the debt ceiling dispute from 2011, the political context back then was notably different.
“The debt ceiling fight and the downgrade occurred simultaneously. Moreover, S&P’s downgrade in 2011 was the first time the U.S. was downgraded from AAA, leading to a more immediate and profound shock compared to the potential impact of a second agency downgrading it 12 years later,” Reid explained.
In the meantime, the Federal Reserve had been reducing interest rates and made a commitment during its August policy meeting to maintain rates at an “exceptionally low level until at least mid-2023,” as emphasized by Reid in an email on Wednesday.
Warren Buffett, dismissed Fitch’s U.S. downgrade, stating that it has no impact on the current activities of his conglomerate, Berkshire Hathaway.
Buffett mentioned, “Last Monday, Berkshire purchased $10 billion in U.S. Treasuries. We bought another $10 billion in Treasuries this Monday. And the only uncertainty for next Monday is whether we will buy $10 billion in 3-month or 6-month T-bills,” he revealed.
“There are some things people shouldn’t worry about,” he said. “This is one.”
Experts, like Elliot Hentov and Jim Reid, think it’s unlikely the U.S. will get its top-notch credit rating back due to political instability and financial worries. Warren Buffett, however, doesn’t seem bothered by the downgrade and keeps investing in U.S. Treasuries. The downgrade affected global markets, showing how political disputes can harm the economy.