Default on U.S. Debt Risks ‘Permanently’ Denting Nation’s Credit Rating (2024)

If the U.S. government defaults on its debt even for just a few hours next week, it could have long-lasting consequences for the nation’s future. Three major ratings companies — S&P Global Ratings, Moody’s and Fitch Ratings — play a big role in how damaging those consequences can be.

Because the financial fallout of a default would be severe, the agencies expect lawmakers to come to an agreement before the government runs out of cash to pay its bills, which could happen as early as next month. But if the government ends up missing a debt payment, all three companies have vowed to lower the rating of the United States as a borrower, and they may be reluctant to restore it to its previous level, even if a deal is reached soon after the default.

On Wednesday evening, Fitch fired its first shot across the government’s bow, placing the United States’ rating on watch for a downgrade, a move that “reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit,” the agency’s analysts warned.

The United States has never deliberately reneged on its debt in the modern era, but even a brief default would alter the perception of debt-ceiling brinkmanship as political theater and turn it into a real risk to the creditworthiness of the government,Moody’shas warned.

“Our view is that we would need to reflect that permanently in the rating,” said William Foster, the lead analyst for the United States at the rating agency. The agency has said that if the Treasury Department misses one interest payment, its credit rating would be lowered by a notch. For the United States to regain its previous top rating, according to Mr. Foster, lawmakers would have to significantly alter the debt limit or remove it entirely.

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.