Politics dampens optimism: US downgrade reflects the failure to put a lid on federal spending, says ALEX BRUMMER

The Fitch downgrade of the US’s credit rating to ‘AA’ predictably produced a panicked reaction on financial markets and drew a strong riposte from the Biden Administration.

There were similar responses in 2013 when a ratings agency downgraded the UK in the aftermath of the Great Financial Crisis.

Then shadow chancellor Ed Balls described George Osborne as a ‘downgraded Chancellor’. A decade later the British protagonists are locked together in a podcast.

The American downgrade matters. It affects the credit profile of US companies and the debt profile of government entities raising funds. 

In some cases, where rules are drawn tightly, it may require asset managers to go back to trustees and seek a derogation from existing rules.

Fitch is onto something in spite of the repudiation of US Treasury Secretary Janet Yellen. 

Another credit rating agency Standard & Poor’s moved Washington down a notch to ‘AA+’ in response to the 2008-09 banking crisis. The decision was polluted by hypocrisy.

It was, after all, S&P, Moody’s and others which accorded packages of sliced-and-diced sub-prime mortgages a top rating before they imploded, pulling the whole financial system apart. 

The Fitch downgrade, by coincidence, was unveiled on the same day a special prosecutor delivered a damaging series of indictments against former president Donald Trump over his efforts to falsify his way back into the White House.

In spite of a cascade of legal problems Trump is the frontrunner for the Republican nomination in 2024 – at a moment when Joe Biden is facing challenges from within his own party for the nomination. 

It is rare for a sitting president (it happened to Jimmy Carter back in 1980) to find his grip on power under threat from within his own party.

The financial underpinning for the Fitch decision is the failure of successive presidents since Bill Clinton to put a lid on federal spending. 

An American default was narrowly averted two months ago when Biden and the Republican-controlled House of Representatives ended months of uncertainty and signed up to a £24.5trillion debt limit.

The US’s net debt to GDP ratio stands at 121 per cent and looks set to keep rising given Biden’s spending spree.

How worried should investors be? Not very according to a senior asset managers. 

America, among all the richest countries in the world, has the extreme privilege of being the world’s reserve currency. Efforts by China to diversify into gold and the euro have enjoyed limited success.

A lack of liquidity and trust in anything but the greenback has left it supreme. Most holders do not focus very closely on the federal government’s debt overhang. 

Nevertheless, if portfolio managers do feel the need to adjust the valuations it could still cause temporary volatility and create uncertainty.

All the more reason for the Bank of England to go easy when it sets UK interest rates today.

Guns and butter

Among the reasons why US budgetary policy is the penalty area is the £59bn which the White House and Congress have voted to shore up Ukraine’s defences and the necessary extra capability of American forces. 

Britain will never be in the same class as the US but the country’s primary defence contractor BAE Systems is one of the few overseas weapons manufacturers to enjoy special status at the Pentagon.

War is a terrible thing as anyone watching the awesome movie Oppenheimer or tuning into the BBC’s World on Fire could testify.

For BAE – with its footprint in aerospace, the UK’s seagoing platform and weapons building capacity – it is transformative.

Earnings and dividends are up sharply, there is a £1.5billion share buyback programme and the order book is overflowing with a backlog of £66.2billion.

Quite a rebuke to fund managers who eschew defence companies even when they are battling an evil empire.

Silicon setback

The potential value of Cambridge-based chip designer Arm continues to rocket. 

The latest initial public offering estimate of £55billion, reported by Bloomberg, underlines why it was a disastrous mistake for Theresa May’s government to allow the company to be flogged off to Japan’s Softbank in 2016.

Even more galling Britain was insufficiently robust to bring the re-float back home to the City.

So frustrating for the nation’s tech future.