Asset Based Loan

Another credit downgrade coming with debt ceiling fights?

Will an exploding national debt in 2021 trigger a US government credit downgrade?

Covid-19 and government stimulus programs have instantly added trillions of dollars to the U.S. national debt in just the last year. No one really knows how much longer can this go on before there is a credit downgrade or market driven interest rate increases.

In recent years, the treasury department took extraordinary measures by moving money around to meet the government’s commitments.  Congress finalized lists of requirements they demanded that the administration meet in order to ensure cooperation.   However, bond rating agencies didn’t care much.

They stated that another round of fights may trigger a further credit downgrade of U.S. Treasuries.   Is another credit downgrade coming with the upcoming debt ceiling fight?

Counter arguments have been made by some U.S. politicians that not increasing the debt limit will not be a crisis. How? They say Congress could authorize payment of principal and interest on existing U.S. debt, while not paying obligations in other areas.  

However, bond rating agencies such as Fitch has indicated that such a ploy will basically be considered a thinly veiled default and may still trigger a review of the Government’s credit rating.   Their view is that such a move is nothing more than debt prioritization. It pays certain obligations but not others, and is just another term for default.

Politicians have already shown that they are willing to use the debt ceiling as a political weapon at the expense of the nation’s credit.

Compromising to save the nation’s credit rating does not seem to be a concern. The nation’s credit deserves far better than this from both parties.  It appears that the more extreme wings drive the debate to a head.

Another major danger in this type of fighting is that the debt limit has to be increased roughly every year. This is because it is only increased a relatively small percentage after each fight is settled.

If the branches of Government authorize ongoing increases by an already agreed to plan, these credit downgrade threats would largely go away.

The national debt problem will have to be addressed at some point. Until then, missing payments and threatening default make the problems worse.