‘Why now?’ Fitch’s downgrade threat raises questions

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Brendan Bordelon Contributor
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Could Fitch Ratings’ warning that it may downgrade the United States’ AAA credit rating due to the ongoing debt ceiling debate be politically motivated?

“My question is ‘Why now?’” John Berlau, an economist at the free market Competitive Enterprise Institute, told The Daily Caller News Foundation. “I just have that one statement by Fitch to go on, but no other credit rating agency seems to think the debt ceiling drama by itself merits a downgrade.”

“It’s not inconceivable — and I can’t prove this — that Fitch is trying to get in good with the Obama administration by threatening to do a [downgrade] to help the administration in the debt ceiling hike, but not actually doing a downgrade,” he continued.

The statement by Fitch Ratings, released late Tuesday afternoon, gave highest priority to the political impasse in Washington, not runaway government spending or the structural debt.

“The prolonged negotiations over raising the debt ceiling . . . risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S.,” the ratings agency wrote.

But Berlau explained that Fitch’s threat may be designed to avoid punishment from the Obama administration if future fiscal woes eventually force them to downgrade America’s credit rating.

In February, the Department of Justice filed a $5 billion lawsuit against Standard and Poor’s, the credit rating agency that first downgraded the U.S.’ credit rating in 2011. The DOJ alleged that the ratings agency purposefully gave deceptive ratings to toxic mortgage-backed securities, eventually precipitating the 2008 financial crisis.

But other ratings agencies, including industry giants Moody’s and Fitch, also overrated the same securities. “For some reason Moody’s and Fitch were left alone, even though they all gave mortgage-backed securities AAA ratings,” Berlau said.

Berlau also noted that Egan-Jones, a smaller ratings agency which also downgraded the U.S. credit rating in 2011 for federal overspending, was barred from issuing ratings on certain bonds by the Securities and Exchange Commission, an unprecedented move.

“There’s a pattern of intimidation of credit rating agencies, both [bigger] and smaller ones,” he said. “There’s a pattern of prosecution of those that don’t toe the administration’s line and will hammer the administration on spending and debt.”

Standard & Poor’s agrees, arguing in a September court filing that the Obama administration’s lawsuit was in retaliation for their credit rating downgrade two years ago. The ratings agency called the government’s action “impermissibly selective, punitive and meritless litigation.”

Although concerned about Fitch’s possible intimidation by the federal government, Berlau was less worried about the prospect of a credit downgrade itself.

“So what if it’s downgraded from AAA to AA+?” he asked. “So the government has to pay a little more for borrowing. Well, then the government couldn’t spend as much. Is that a bad thing?”

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