Mohamed El-Erian on Fitch’s US debt downgrade: 'Why now?'
Fitch Ratings’ downgrade of US government debt has economists and investors puzzling over timing.
“Why now?” Mohamed El-Erian told Yahoo Finance Live. “When you look at the reason, you scratch your head as to the timing of this.”
Fitch’s downgrade is the second ever for the United States, after S&P’s cut on Aug. 2, 2011. That decrease was spurred by Congress’s fight to raise the debt ceiling and avoid a government debt default; an agreement had been struck four days earlier. S&P’s rating on US debt remains at AA+.
Sound familiar? A similar debt ceiling standoff and ensuing agreement played out this spring, and Fitch put U.S. debt on downgrade watch at that time, followed by the actual downgrade yesterday.
The reasons cited by the agency echo the same issues behind S&P's cut more than a decade ago: “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch wrote.
A Fitch senior director told Reuters that the country’s political polarization played a role as well, reflected in part by the Jan. 6, 2021, insurrection.
El-Erian, president of Queens’ College, Cambridge University and an economic adviser to Allianz, said these are not new problems, and while the US does have a high level of debt, the economy is growing enough that the debt burden doesn’t present a challenge right now.
“We don’t have a debt problem as long as growth continues to pick up, and one of the upside surprises has been not only that actual growth has picked up, but that potential growth is starting to be positively impacted by policy.”
Economists at Bank of America became the latest to discard their recession call today.
What’s more, El-Erian pointed out, the global markets are relative. If investors crave what’s perceived as a safe investment, even with a downgrade, US debt is seen as a sound bet.
“There is no single other country that can replace the US in terms of reserve currency and in terms of the most liquid financial system. So, I don’t think that this Fitch rating changes anything, because if you were to apply this same criteria to other countries, you would probably downgrade them as well.”
There was a bit of split decision in markets following Fitch’s downgrade. Yields rose on 10-year US Treasury notes (^TNX) to their highest since November, as prices fell. Yet the US dollar (DX-Y.NYB) climbed.
“If people were taking this Fitch downgrade as a serious signal, we would expect that DXY index to be weaker,” El-Erian said.
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9am-11am ET. Follow her on Twitter @juleshyman, and read her other stories.
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