Standard & Poor’s downgrades US to AA+
“That the US Credit Rating was revised, is a headline from a 2011 event, but interestingly enough (in this time of COVID-19 pandemic), the US credit rating is again under threat of downgrade – this time (in 2011) by ratings agency, Fitch.”. Continuum Financial Planners note that Fitch subsequently retained the US AAA credit rating, but placed it on a negative watch.
Introduction
In 2011, Standard & Poor’s downgraded the US’s AAA credit rating to AA+ for the first time. The downgrade followed its judgment that the agreed debt ceiling failed to adequately cut spending to reduce their record deficits. And they kept the rating outlook negative.
Standard & Poor’s action came despite the US Congress discussing the influence credit agencies then had on the broader economy. This influence is enshrined in the Dodd Frank Act. Congress followed through on the warning it gave prior to debt ceiling resolution being agreed at that time.
Rating revision impact on markets/economies
It’s difficult to know what effect the potential for a credit rating downgrade would have on the market. The move was already factored into market expectations during the debt ceiling political stalemate. We previously commented that a temporary resolution to the debt ceiling situation wouldn’t settle markets. We still believe that only a credible long-term solution to US debt will create prolonged calm.
Treasuries are being pulled between safe haven buying and the lower credit rating. We may see better rated sovereigns around the world continue become more expensive. In doing so, will offer lower yields in the short term as their popularity increases. Absent Moody’s and Fitch also announcing downgrades, a selloff of US bonds wasn’t anticipated from the actions of Standard & Poor’s. It was also noted that Fitch wasn’t due to issue its rating update until the end of that month.
Rating revision impact on investors
Ultimately these events do mean that, for Standard & Poor’s at least, there’s a slightly higher chance of a US default. In reality most are agreed that the US can continue to pay its obligations. In addition, the political turmoil that has led to this uncertainty remains one that can be voted away if necessary.
Opportunities this presents
Despite what seems like more dramatic events coming out of the US, we still believe that it’s unlikely to lead to a longer-term issue for markets and produce a contagion effect. Investors need to continue to be aware of the short-term volatility and weakness, but we remain positive on the underlying market fundamentals playing out in growth markets and believe reactions like these present opportunities for building longer-term positions.
Summary
- The next few days are important in terms of assessing the true market impact but we don’t anticipate a contagion effect.
- We continue to see any weakness as a result of these short-term issues as potential buying opportunity of growth assets for our longer-term strategy.
- Extreme financial asset market volatility and the adverse impact this has on the direction and health of the global economy is well understood by policy makers. As in the past, key central banks and other policy makers are likely to rally around and implement coordinated action to steer the global economy onto a more favourable growth path.
The issue of the information contained in this article is solely authorised by –
- Advance Asset Management Limited (Advance) ABN 98 002 538 329,
- holder of Australian Financial Services Licence No. (AFSL) 240902, and
- a member of the Westpac Banking Corporation ABN33 007 457 141 (Westpac) group of companies (Westpac Group).
Credit Ratings matter: our advice matters
The team of experienced advisers at Continuum Financial Planners Pty Ltd monitor the credit rating of countries in which client funds are invested. The US credit rating downgrade in 2011 was certainly concerning. Fortunately, its impact was not as great on the US as a downgrade elsewhere might have been. As the USD (the US dollar) is a global reserve currency the downgrade had minimal impact on their investment markets.
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(This article was first posted by us in August 2011. It has occasionally been refreshed, most recently in January 2025.)
