Debt Ceiling: Why the U.S. Won't Lose Its AAA Rating
In 2011, lawmakers merely threatened a government shutdown as the United States' debt surged toward the debt ceiling. Standard & Poor's, owned by McGraw-Hill Financial , then went on the offensive, slashing the government's debt rating to AA+. So, too, did the smaller Egan-Jones.
The other ratings agencies, Moody's and Fitch, kept the U.S. government at AAA, the best possible credit rating.
What followed after was interesting, to say the least. In 2012, Egan-Jones became subject to an inquiry by the SEC, which later voted to bring administrative action to strip away its ability to rate government debt for 18 months.
In 2013, the Justice Department brought a suit against Standard & Poor's for its financial crisis-era ratings. This was the first of federal action against the agency for its involvement in rating subprime debt as AAA credits.
But that February 2013 suit only named Standard & Poor's. Moody's and Fitch -- which had also issued AAA ratings for mortgage securities that proved to be anything but high quality -- never got their time in the courtroom.
Standard & Poor's shot back quickly, claiming they would defend themselves "vigorously." The battle is far from over -- these kinds of lawsuits tend to take years to reach a conclusion. But whether or not Standard & Poor's wins or loses, it'll have a costly legal bill to pay either way. Lawyers are the only winners in a high-profile case.
A grand conspiracy?
It's been more than eight months since the Justice Department sued Standard & Poor's, but Moody's and Fitch have remained scot-free. Egan-Jones is still in the sandbox, unable to issue ratings with a government stamp of approval.
This may explain why Moody's and Fitch have been so quiet through this government shutdown and debt ceiling debacle. Moody's recently reaffirmed its AAA-rating of U.S. debt with a stable outlook, noting an improved debt trajectory. Fitch merely said that failure to raise the debt limit in a "timely manner" would force it to reconsider its ratings.
That's it -- warnings of action, not action. Any downgrade from Moody's and Fitch would come only when the government absolutely deserves it -- if it allows the government to default on its debt.
If you're watching and waiting for the U.S. government to lose its gold-standard, AAA-rating, you can probably forget about it. The last two agencies that went so far to strip an AAA rating from the U.S. government found themselves subject to regulatory scrutiny.
Moody's and Fitch have their own pre-financial crisis skeletons in the closet. Lowering the government's debt rating from AAA would be a surefire way to bring these problems back into the light. For that reason, I wouldn't expect a downgrade any time soon, if at all. The agencies are just too chicken to call out Congress' shenanigans.
Learn more about the government's big national debt
The U.S. government has piled on more than $10 trillion of new debt since 2000. Annual deficits topped $1 trillion after the financial crisis. Millions of Americans have asked: What the heck is going on?
The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!
The article Debt Ceiling: Why the U.S. Won't Lose Its AAA Rating originally appeared on Fool.com.Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.