Credit ratings, which range from D or C (for S&P and Moody’s scales) to AAA or Aaa for the most pristine borrower, are embedded in financial contracts around the world, at times dictating the quality of debt that pension funds and other investors can hold or the types of assets that can serve as collateral to secure transactions. Ratings also signal the soundness of a nation’s finances, with lower-rated countries tending to face higher borrowing costs.
For the United States, a debt-limit deadlock that resulted in a default “would not be consistent with the highest rating possible,” Mr. Foster said. “But if that rule is removed, if it was reformed in a way that it was no longer a major concern in terms of creating a default scenario, then that would be a context for potentially revisiting the credit profile and that maybe could result in bringing it back to Aaa.”
S&P lowered the credit rating of the United States by one notch during a debt-limit bout in 2011, even though a deal was eventually reached and default averted. The agency has kept the rating at this slightly lower level, AA+, ever since.
“The thing that was most powerful in the 2011 decision was the political setting and that you had a very clear path to default. And it’s still there,” said John Chambers, who was part of the S&P team that downgraded the government’s rating then. “The current debate validates S&P’s decision to cut the rating and leave it there.”
A similar move by either Fitch or Moody’s would drop the United States from a small club of the most highly rated debt issuers in the world. (Many investors still consider the United States triple-A, since that’s its rating from two of the three authorities.) Moody’s awards its Aaa rating to only 12 countries, and a downgrade would place the United States in a category beneath the likes of Germany, Singapore and Canada.