x Abu Dhabi, UAEMonday 22 January 2018

Even the most powerful economy is not immune

Moody's and S&P issue warnings over the state of US creditwortihness, showing that even the world's most powerful economy is vulnerable to ratings.

Moody's and S&P issue warnings over state of US creditworthiness

The influence of ratings agencies in shaping global financial markets was powerfully demonstrated this month.

As US treasuries and the dollar weakened substantially, equity markets around the world tumbled after Moody's Investors Service warned that the world's biggest economy was on course to lose its top credit rating if Congress failed to resolve an impasse on the government's US$14 trillion-plus (Dh51.42tn) debt limit.

Gold prices surged to a record high and the Swiss franc climbed to a new peak against the dollar as investors sought refuge in haven assets.

Moody's has never rated the US government below "AAA" since it began evaluating the country's debt in 1917.

Moody's predicted a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations".

The pressure on US politicians then increased when Standard & Poor's (S&P) became the second agency in as many days to question the global standard for safe investments.

S&P said there was at least a 50-50 chance it would cut the top-grade rating on long-term Treasury debt in the next three months.

The agency said it might cut the rating a notch or more to the "AA" category if it appears Congress and the White House "have not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future".

Politicians have to raise the debt ceiling by August 2 to ensure the US can pay its bills. Fitch Ratings is the only one of the three big ratings agencies to have a "stable" outlook on US ratings. It said last week it would decide next month whether the US deserved to keep its "AAA" credit rating.

"As soon as an agreement is reached and has been announced, we will incorporate that into our analysis and we'll make a comment on the US sovereign rating and its outlook - hopefully by the middle of August," David Riley, Fitch's main analyst for the US, told Reuters.