S&P analyst feels ‘vindicated’ as Fitch copies his decision to strip U.S. of AAA rating after 12 years.

S&P analyst feels 'vindicated' as Fitch copies his decision to strip U.S. of AAA rating after 12 years.

The Man Who Predicted America’s Credit Rating Downgrade

In 2011, the financial world was in turmoil as the United States faced the possibility of a credit rating downgrade. At the center of this storm was a man named David Swann, the director for sovereign credit ratings at Standard & Poor’s. Swann took the bold step of downgrading the country’s prized AAA credit rating, a decision that sent U.S. equities into a tailspin. This move by Swann would later be vindicated as Fitch, one of the major credit rating agencies, recently followed suit.

Back in 2011, the country’s debt was a cause for concern, and Swann clashed with the Obama administration over the unsustainable trajectory of America’s debt. He projected that the debt-to-GDP ratio would soar to 85% a decade later, a forecast that was disputed by the White House at the time. However, reality has proven far worse than Swann expected, with the current debt-to-GDP ratio standing at well over 100% and predicted to increase further.

The issue of America’s debt is extremely sensitive because the country’s ability to live above its means is largely thanks to its status as the issuer of the global reserve currency. This advantage allows the U.S. to borrow at lower interest rates compared to other countries. It hinges on the fact that companies worldwide must hold U.S. dollars to settle their accounts when conducting international trade. The Federal Reserve’s intervention by providing more dollar-denominated lines of credit to central banks is seen as a sign of stress in the global financial system.

The recent decision by Fitch to downgrade the United States’ credit rating highlights the internal risks that can prove to be just as damaging as external shocks. The 2011 warning shot by Swann was a wake-up call that a vibrant U.S. economy is not enough if there are fundamental issues with the country’s fiscal governance. The hyperpartisanship and political gridlock that have become a recurring theme in American politics play a significant role in the downgrade. Unlike parliamentary democracies where a prime minister must have a majority in the legislature to form a government, the U.S. system often leads to crippling gridlock when different parties control the White House and Congress.

It’s important to note that a sovereign credit rating is not an evaluation of a country’s overall economy, but rather an assessment of the likelihood that holders of the government’s debt will be paid on time, in full, and unconditionally. Swann’s recent media tour has shed light on the factors that influenced Fitch’s decision. He pointed out that countries like Germany, which retain their AAA rating, benefit from stronger fiscal governance compared to the U.S.

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The downgrade in America’s credit rating serves as a stark reminder that a strong economy alone is not enough to maintain a gold-standard rating. It’s crucial for the United States to address its internal risks, fiscal governance issues, and political gridlock to regain its credibility in the global financial system. As the lone credit rating agency with a AAA rating, Moody’s will likely face increasing scrutiny, and it remains to be seen if others will follow Fitch’s lead. Regardless, the downgrade is a sobering wake-up call that America’s economic strength must be matched by responsible fiscal governance to preserve its position as the world’s leading economic power.