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US Debt & Its Downgrade Problem

Last week Fitch rating agency downgraded the USA rating by one measure. The main reason cited for this was a regular disagreement on debt limits and governance relating to debt issuance. Most of the investors and other related parties downplayed its importance. But given that by the end of August, government funding has to be approved to avoid a shutdown it is an event that is critically timed.

As per estimates and keeping similar interest rate levels, the US government will start paying $1 trillion per year in interest rates. Even the amount being raised by US Treasury this quarter is higher by $300 Bn compared to estimates.

Though the risk of a default by the government has been avoided till 2025. But the fight against inflation is costing not only the US government higher interest bills but most countries. This does create a problem for highly leveraged or cash-burning companies in those countries.

For the past three years, there has been a volatility wave in the real economy that has forced the highest bankruptcy rates this year in the US, UK and other countries. This real economy volatility will become difficult for many companies to navigate ahead as inflation driven by food and energy returns this winter and interest rates at least in the market move up.

This would result in a slow fall and even a slower recovery in the base case scenario ahead.


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