In its first official foray in the sovereign ratings sector, Kroll Bond Rating Agency on Wednesday assigned an AAA long-term issuer rating to the United States of America and gave the USA a K1-plus short-term rating. The ratings were unsolicited. KBRA added that it has given the country’s long-term ratings a stable outlook.
One of the key reasons for the top quality ratings assignment was the premier reserve currency status of the U.S., said Joan Feldbaum-Vidra, managing director of KBRA’s sovereigns group, and author of the report. “It is very distinct from any other country in the world,” she said.
Feldbaum-Vidra also pointed to the fact that “the U.S. government can finance itself” as being a key factor supporting the rating.
According to the report the main credit factors supporting the ratings include:
- Premier reserve currency status, providing the federal government with abundant access to liquidity;
- The world’s largest economy, accounting for one-quarter of global GDP;
- Relatively favorable, although deteriorating demographics; and
- A robust institutional structure and competitive economy that provide for sustainable growth and investment.
KBRA said the main credit concerns include:
- A widening federal deficit and growing debt, which already exceeds 107% of GDP;
- Increasing polarization of domestic politics and greater variance (and unpredictability) in policies that could serve to dampen investment;
- Falling productivity; and
- A large external current account deficit that suggests competitiveness pressures.
“The sovereign ratings of the United States of America are supported by its status as issuer of the most important reserve currency in the world,” KBRA said in the report. “U.S. Treasuries are widely regarded as the world’s safest investment, affording the U.S. government abundant access to liquidity. Unbound access to liquidity has been forthcoming even during times of extreme stress – indeed, even during crises generated by the government or within the U.S. economy. The U.S.’s premier reserve currency status is the most critical factor underlying the sovereign’s AAA credit rating. The U.S.’s AAA rating serves as a benchmark for all other ratings in KBRA’s rating scales.”
Moody’s Investors Service and Fitch Ratings also assign triple-A ratings to the United States, however, S&P Global Ratings assigns the U.S. an AA-plus rating. All three agencies assign stable outlooks.
KBRA’s stable outlook is “based on the expectation that there will be no change in the importance of the U.S. dollar as the key reserve currency in the world over the medium to long term. KBRA’s belief reflects the expectation that the fiscal deterioration, domestic political discord, and policy uncertainty that have become more pronounced will not meaningfully reduce demand for U.S. dollar assets. KBRA’s outlook also considers the unmatched depth of the U.S. capital markets, which is an important factor behind the U.S. dollar’s position as the premier global reserve currency,” the report said.
KBRA said the Federal government’s debt includes $14.8 trillion held by the public (77% of GDP) and an additional $5.69 trillion held by government agencies or trust funds (30% of GDP), according to January 2018 data.
“Total government debt stands at $20.5 trillion or 107% of GDP. Foreigners hold 43% ($6.3 trillion) of debt held by the public. China and Japan are important investors. This concentration is not viewed as a risk as KBRA does not expect appetite for this premier reserve currency to wane,” the report said.
Feldbaum-Vidra said that KBRA is expanding its sovereigns group and that the rating agency recently opened an office in Dublin, Ireland. Feldbaum-Vidra has over 20-years of experience and has been at KBRA for over a year, Previously, she was head of sovereigns at ARC Ratings in Europe and began her career at Moody’s as a sovereign analyst.
KBRA’s expansion comes at a time when another rating agency has made some organizational changes in the sector.
On Monday, it was reported that S&P merged its sovereign ratings groups and let go of an unspecified number of analysts. CNBC cited Reuters reporting that two of the firm's three rating divisions, Sovereigns-International Public Finance and Financial Services' were combined at a regional level last month. A source told the news organization that over 100 analysts had been laid off.
An S&P spokesman confirmed changes had been made, but declined to put a number on layoffs.
"We have made some organizational changes globally as we continue to move toward a structure that is simpler and more effective," CNBC quoted the spokesman as saying. "Some individuals are leaving the organization as a result."
