Fisher Investments On Debt Ceilings and Downgrades

The US was warned its debt rating is on review, tied mostly to a political debate over an arbitrary marker—something that has happened before with no ill effect.

(This article constitutes the general views of Fisher Investments as of July 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.)

Moody’s put the US on review Wednesday for a possible downgrade. The move wasn’t unexpected—Moody’s indicated in early June it would put the US on review if progress wasn’t made on budget and debt ceiling talks by mid-July.

In Fisher Investments’ view, this remains mostly a political issue likely to be resolved before August 2. But if it’s not, a default isn’t imminent nor are the consequences particularly dire.

Incidentally, here’s a quote on this debate from the NY Times:

In a warning shot fired at Washington, one of the nation's leading credit-rating services announced late today that it was considering lowering its rating for ... Treasury securities because of its growing fear that the budget deadlock of Congress and the White House could lead the Government to run out of money.

Wall Street executives said the announcement, which came late this afternoon as the bond market was closing, was clearly an effort to force the White House and Republican leaders in Congress to resolve their differences over raising the debt limit, the Congressionally set ceiling on Government borrowing.

The warning itself, they said, could force down the price of the specific United States bonds named by the agency, Moody's Investors Service Inc. And it would signal that the United States might soon have to pay more to borrow money . . . No one doubts America's ability to pay. The only question is whether an extension of the nation's debt limit will continue to be held hostage to the budget dispute.

Only this article ran in January 1996.* Recall, 1996 and the balance of that decade were terrific ones for the US and global economies and stock markets.

(For more on our views on the debt ceiling, see here, here and here.)

* David E. Sanger, “Moody’s Says It Is Considering Lowering US Credit Rating,” The New York Times, January 25, 1996.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.