Investors and bank account holders alike should breathe a sigh of relief. Today Fitch Ratings affirmed the AAA credit rating of U.S. government debt, joining Moody's. From the Fitch report:
The affirmation of the U.S. 'AAA' sovereign rating reflects the fact that the key pillars of U.S.'s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks.'
Standard & Poor's downgrading the U.S. was definitely big news last week, but the stock volatility and economic uncertainty that accompanied it was just a drop in the bucket compared to what would have happened this week had Fitch decided differently.
During my research for my story on the S&P downgrade, the experts I spoke to said many institutional investors and investment funds require a certain amount of their portfolio to be certified by two of the three major ratings agencies as AAA. Many of them hold Treasuries to satisfy that requirement, but had either Moody's or Fitch joined S&P in downgrading the U.S. government's debt, they would have had to sell off their Treasuries and try to find something else to satisfy their AAA requirements.
As I pointed out in my article, a massive, global sell-off of Treasuries would be really, really bad for the banking industry and for bank customers. Many banks use the repo market to satisfy their short-term funding needs, borrowing money from other banks on a highly temporary basis and offering Treasuries as collateral. If Treasuries lose a big chunk of their value, banks have to put up more of them to borrow money, and the cost of doing business goes up. What's more, the cost of taking out any kind of loan would skyrocket, since a lot of lending rates move in tandem with Treasury rates.
And lest you think that would mean higher deposit rates for you, think again. The massive global flight to safety that would result from a double downgrade would likely push deposits at U.S. banks even higher than they are now, and we're already at a point where one U.S. bank has already told big depositors it intends to start charging them for holding deposits. Add to that the fact that loan demand is still sluggish and that the damage to the repo market would squeeze banks margins so much they couldn't afford to pay high interest if they wanted to, and you have a recipe for disaster.
I'm hopeful that Fitch and Moody's will continue to keep their ratings for the U.S. stable, but if they don't, make no mistake: The banking industry and its customers will suffer massive disruptions.
What do you think? Does Fitch and Moody's affirmation of our AAA rating make you feel better? Do you think they'll keep it up?