United States, Fitch Ratings, James Mccormack discussed on Bloomberg Markets
The government shutdown is entering its twenty first day without a resolution in sight. The question becomes at. What point does this gridlock? Imperil? The US is triple a rating joining us now James McCormack global head of sovereign debt at Fitch Ratings training us from London James. Thank you so much for being with us. Fitch Ratings has sounded a bit of an alarm saying that if this government shutdown does drag on much longer it will consider a downgraded to the top rating that the US currently enjoys please explain. Yeah. That's right. I guess there's a couple of things that really come into focus really the longer. This goes on one is conflicted. With a note we put out last week. We said, you know, this foreshadows or more pronounced destabilization of policy-making that would include the standoff over the debt limit, which is really much more important than than the shutdown. I think we'd have to be quite concerned about that. And and the second sort of parallel track. Whereas we're thinking about is that the policy-making framework matters so much in the US because there are some pretty big fiscal policy. Challenges ahead in addition to the debt limit so the fiscal deterioration that's underway with deficits in order five and a half to six percent and the debt level where it is without at around one hundred percent the way we measure it without a resolution in sight kind of sets the fiscal trajectory of the US on a slightly different path than what we would see in other AAA. So we do have to think about it knows context. Well. Chairman of Powell drum Palo the Federal Reserve said at the economic club meeting that he's concerned about the level of the US debt. And that it is something that they have really no power over as a result. What do you think will will it take to get lawmakers to focus on it? Well, that's a very good question. Because lawmakers have not been focused on it for some time. This is a debt burden that has been creeping higher. Congress has not yet taken on the issues that need to be resolved. And the primary issue why the deficit continues to grow in addition to the tax cut tax cuts. We've just seen is really on the mandatory spending side, and that is going to be a very difficult issue for for politicians to to embrace. But at some point. Down the line that doesn't need to be addressed. If you look at Congressional Budget Office projections over the next ten years. It's very clear that there are two items two items on the spending side where things need to be need to be addressed is on the mandatory spending. And and the other is really interested. So both of those things are rising very quickly to the interest burden. Can't do much about that unless the debt comes down but mandatory spending something can be done about that. But it's very very difficult politically to get agreement on that. So James is there sort of a deadline for which the US has to come for come to a resolution for you to stop taking a look at the AAA rating. In other words, how long does this have to go on before you really do consider stripping the US of the top rating? Yeah. It's not so much about the shutdown. It's really more of a debt ceiling, and as you may you may know the debt ceiling comes back into the beginning of March. And then the treasury begins to use what he calls extraordinary measures at that point. So there's probably a couple of months before that really begins to buy when we last put took any rating action on the US was to put it on rating watch negative and that was back in twenty thirteen when when the period during which extraordinary measures operate with coming to an end. And there was no resolution in sight, we within forty eight hours of the so-called ex- date. And I think we would need to be in a position similar to that before we thought about a rating action. So that in turn down the road one thing that I don't understand though, if these situations keep arising, and it does not appear that gridlock is going to ease anytime soon in Washington, why not downgrade the US now. Yeah. I mean, we kind of down this road before. But not quite as pronounced. And that's why we're that's why we're talking about it now because we want to make sure that you know market participants. In other observers understand our position if were to take the rating action on the US, we want that to be as well flagged as possible. And so we are seeking about it now because it's an issue that we think the markets should be made aware of. But we're not in a position to suggest that this is definitively going to happen. So there's still plenty of time for congress and the White House to act to resolve both feed the shutdown and then subsequently to to address the debt limit manufactured happens as it has in the past. Then the AAA rating is is is probably sound James. If you believe that a recession is coming in two thousand nineteen would that change any of your ratings? I don't think so I mean the rating is supposed to be resilient. True and economic cycle. We don't see a recession in fact in in twenty nineteen. We don't see a recession in in in twenty twenty either we certainly see slowing growth, particularly as the fiscal stimulus begins to fade in twenty nineteen. We will have weaker growth towards the end of the year. Two twenty twenty we see growth only in the in a ram two percent in this year. We see it it sort of two point six percents. So definitely a slowing of growth, but not a recession. And I don't think we would be wanting to suggest that the US rating was under under any kind of threat from out from a normal economic cycle, including one that was inclusive every recession we're gonna leave it there. But thanks very much for being with us. James McCormack is global head of global sovereigns and supernational at Fitch Ratings. Speaking about the US sovereign debt rating at a time when there's a bit of buying the treasury market right now, the thirty year trades at three point zero two percent up twenty seven thirty seconds the.