Remember America’s triple-A credit rating? The benchmark that was eroded during the debt-ceiling standoff last year? The highest-quality measure of creditworthiness matters greatly in this country and beyond. Yet it is still disturbingly unclear who is responsible for safeguarding what remains of this important national attribute.
A triple-A credit rating is what economists call a public good. By reducing borrowing costs and increasing the availability of financing, it is “consumed” and is of benefit to many. But this public good is also difficult to value holistically or to sustain properly.
America’s triple-A rating is vulnerable. Two of the three major rating agencies, Moody’s and Fitch, have given it a “negative outlook,” signaling real possibility of a downgrade in the next two to three years. Standard & Poor’s downgraded the U.S. credit rating late last summer in the context of the debt-ceiling debacle and, adding insult to injury, placed the nation’s lower, AA-plus, rating on review for possible downgrade.
With few sovereign triple-As remaining in the global economy, those deemed to have superior credit collect a consequential rent for providing “risk-free assets.” Indeed, some triple-A securities, such as short-dated German government instruments, carry negative interest rates.
The U.S. credit rating not only benefits financial conditions at home but matters to the global economy. It facilitates the intermediation of surpluses and savings today and for future generations. It is a key component of the nucleus of the international monetary system.
Further damage to America’s credit would weaken the global economy. It would push even more countries and companies to shift from “pooled insurance” to less efficient self-insurance. It would accelerate the disorderly transition to a global system with multiple, ill-defined, partial and incomplete reserve currencies. And it would further undermine the legitimacy of multilateral institutions.
In the aftermath of the S&P downgrade, some questioned the value of these considerations. After all, the global economy continued functioning without interruption; and rather than rise, the yields on U.S. government securities have fallen.
But skeptics should not question the value of what remains of America’s triple-A credit rating. What has happened so far — or, put another way, the calm that has been maintained — is a reflection of some peculiar factors that are unlikely to persist for many years.
The downgrade’s direct impact on U.S. Treasury yields was more than offset by the lowering of consensus growth projections and announcement-driven expectations that the Federal Reserve would keep policy rates floored at zero through at least June 2013. Both of these factors serve to lower the term structure of interest rates.
The United States benefited from at least three other factors: First, the European debt crisis has channeled to this country funds from investors seeking safety and liquidity. Second, because many investors use the ratings of two agencies as benchmarks, rather than just one, S&P’s downgrade did not automatically trigger widespread guideline restrictions. And, third, the U.S. and global economy benefited from the truism that you cannot replace something with nothing. No sufficient triple-A options exist to take over the national and global role of the U.S. economy. This leaves the U.S. and global economies insulated, at least in the short term.
Over time, though, these factors will shift and erode. That points up the need for more focused efforts to safeguard America’s rating, as does the fact that precedents suggest it takes at least nine years to restore a credit rating downgraded from triple-A.
The bad news? Few could say with certainty which, if any, public officials or agencies wake up every day worrying about America’s credit rating. This persistent vacuum is noteworthy at the national and multilateral levels. That must be addressed.
The good news is that the necessary actions are totally in line with the other major interests of the U.S. and global economies. Essentially, they involve reducing the medium-term burden of indebtedness while enhancing the economy’s ability to grow and prosper. America needs to work seriously at both.
Maintaining the U.S. credit rating should figure prominently among the new-year goals and resolutions of Congress, the administration and Washington’s bureaucracy. By addressing these issues, more will be accomplished than merely safeguarding a rating. The aspirations of millions frustrated by unemployment and underemployment, an increasing number of those in poverty, and the well-being of the global economy will all be better served, as they urgently should.
By Mohamed El-Erian, chief executive and co-chief investment officer of the investment management firm Pimco and author of When Markets Collide.