Not Making The Grade

The nation's complex and contentious fiscal processes are deemed a credit risk.

In 2011, I had just started a long-overdue vacation in Wisconsin when news broke that Standard and Poor’s (S&P) was downgrading U.S. government debt. On Tuesday this week, Fitch Ratings did the same thing…while I was enjoying time off in Wisconsin. My boss has already informed me that travel across the state line from Illinois will be strictly forbidden from now on.

Issuance of bills, notes and bonds will now carry an AA+ rating from Fitch, down from AAA. The United States has a lot of companies at the new level; there are now only nine sovereigns in the world that still carry the top grade.

AAA Stable Outlook

The timing of the Fitch action was interesting. The decision cited “a high and growing general government debt burden” and “a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters.” While both issues are troubling, neither is novel. The debt ceiling debacle, which frustrated investors for weeks, was resolved two months ago with bipartisan support.

However, fiscal discussions since then have showcased the difficulty that America faces in dealing with its debt and deficit problems. The budgeting process itself is awkward; broad outlines can be approved, but battles over the details can still end in stalemates. Twelve major appropriation bills have to be adopted every year by September 30; that affords plenty of opportunity for friction.