US Debt Gets a Downgrade. Does It Matter?

On Tuesday we saw Fitch Ratings downgrade the US Government debt from AAA to AA+. They are the second ratings agency to do so, after Stand and Poor’s ( S and P ) did so in 2011. Yes, you read that correctly – 2011. So, for the last 12 years Standard and Poors has had a AA+ rating on United States debt. I think we could all agree that the US government has had no issue issuing new debt and printing money with the lat downgrade. US Government debt has grown by TRILLIONS of dollars over the last 12 years, so the last downgrade did nothing to stop the US from borrowing.

Since the US Dollar is the world reserve currency, countries, businesses ,and a lot of individuals are forced to buy and hold USD whether they want to or not. Global trade and commerce mainly transacts in USD, and people must hold USD reserves to facilitate the trade. While is certainly isn’t great news to see the downgrade, it isn’t as bad as some make it out to be.

What effect will this have on Canada? Not much really. Canada is in a completely different boat fiscally, and bond issuance wise, and while it may play some havoc on intra day exchange rates on CAD vs. USD, I expect it to be a short lived event. In essence, it may cause some volatility to raise in bonds, currencies, and even equity markets as there is so re balancing, but in the grand scheme of things, it will be a small event. There are much bigger issues than the down grade of the US credit rating that we should be worried about.

We also need to remember that credit rating agencies held AAA ratings on CMB’s, mortgage loans, and banks heading into the fall of 2008, and ONLY AFTER the complete and utter explosion did they change their ratings to less than AAA. Events like that make me wonder if the ratings agencies even matter anymore. They lost a lot of credibility in 2008, and have long struggled to re claim it. Many feel that without the high ratings given out by Fitch, S and P and Moody’s, the great financial crisis in 2007 and 2008 would not have been near as bad.