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Speaker 1: And of course, the bigger story in markets is Fitch

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Speaker 1: downgrading the US government debt Fitch cutting the US sovereign

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Speaker 1: credit grade to one level, from triple A to double

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Speaker 1: A plus. The move comes just two months after it

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Speaker 1: worn The rating was under threat as lawmakers flirted with

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Speaker 1: default by battling over raising the nation's dead limit. Now

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Speaker 1: the move sparked criticism from Washington and Wall Street, including

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Speaker 1: from Christiana Mamani from Lafayette College.

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Speaker 2: Is it totally unjustified? Probably not. Having said that, the

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Speaker 2: likelihood that it has any impact on trading levels are

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Speaker 2: the market. I think even in the short run away

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Speaker 2: from today or maybe tomorrow, I think the likelihood of

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Speaker 2: any impact is pretty pretty small at this moment.

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Speaker 1: Now we welcome in now our global television and radio audiences.

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Speaker 1: I'm Shanali Bassik, joined by Richard Francis. He's Fitch Ratings

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Speaker 1: co head of America Sovereigns who made the call on

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Speaker 1: the US downgrade. Richard, a lot of questions in the market.

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Speaker 1: We've gotten past the initial debt ceiling dispute. Why now?

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Speaker 3: Well, I mean we did right after the resolution of

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Speaker 3: the debt ceiling h with a fyscal Responsibility Act. Mind

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Speaker 3: you just two or three days I have of the

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Speaker 3: X state when they can possibly not begin to not

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Speaker 3: make some kind of a payments once obligations. We indicated

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Speaker 3: them that we would resolve the rating watch in the

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Speaker 3: third order, and we wanted to take our time. We

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Speaker 3: wanted to applying upon the impact of the Fyscal Responsibility

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Speaker 3: Act itself on the on the deficits and on the

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Speaker 3: debt level. We wanted to update our own numbers and

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Speaker 3: look at you know, where we think the fiscal trajectory

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Speaker 3: and the debt is going. And we wanted to just

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Speaker 3: take stock of the actual debt ceiling debate and it's

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Speaker 3: resolution as well. So we want to take our time

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Speaker 3: and give a thoughtful analysis to both the fiscal picture

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Speaker 3: and on the kind of governance issues as well.

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Speaker 1: It's worth talking a little bit about the criteria you

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Speaker 1: set out about a year ago about what it would

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Speaker 1: take to get to a downgrade, because some of the

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Speaker 1: things have changed in terms of the picture. Let's start

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Speaker 1: with the rise in debt to GDP ratio. The significant

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Speaker 1: and sustained rise did not be so significant or sustained,

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Speaker 1: So why is that not factored in here? In terms

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Speaker 1: of the decision made more recently.

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Speaker 3: Well, the debt level has been rising and rising quite significantly.

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Speaker 3: If you look at before the Great Financial Crisis in

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Speaker 3: two thousand and seven, debt to GDP was at below

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Speaker 3: sixty percent. Now it's one hundred and thirteen percent. The

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Speaker 3: one hundred and thirteen percent is almost three times higher

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Speaker 3: than the triple eight. It's more than twice as high

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Speaker 3: as the double A median. So you've had sustained, you know,

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Speaker 3: deterioration over the years. Yes, dept to g peaked after

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Speaker 3: during the pandemic of one hundred and twenty percent and

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Speaker 3: has come down, and that's because you know, inflation and

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Speaker 3: high nonmal GDP growth, and also you know the withdrawal

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Speaker 3: of the stimulus, especially last year. But now we're seeing

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Speaker 3: that levels starting to rise again, and we do not

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Speaker 3: see them stabilizing. We just see them continuing to rise

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Speaker 3: in the in the next three years and probably more

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Speaker 3: over the medium term. And that one hundred and thirteen

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Speaker 3: percent is still thirteen percentage points higher than where it

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Speaker 3: was before the pandemic. So you've had quite a deterioration

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Speaker 3: on the on the fiscal and death side.

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Speaker 1: Well, what about the macroeconomic policy. Here the performance and

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Speaker 1: the prospects moving forward, because in theory this would have

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Speaker 1: been improved a lot from where we were just a

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Speaker 1: year ago. How has that factored in?

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Speaker 3: Well, I mean, honestly, the the obviously the macro picture

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Speaker 3: is very important. We are still calling for a recession

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Speaker 3: and the fourth quarter and first quarter of next year

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Speaker 3: a very mild recession. If that turns out to be

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Speaker 3: a you know, if for whatever reason the US is

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Speaker 3: able to verge a recession, that's positive news, no doubt,

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Speaker 3: But honestly, it doesn't really move the needle in terms

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Speaker 3: of the under underlying analysis. You know, the deficits will

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Speaker 3: remain high no matter what, and that the GDP's that

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Speaker 3: continue to rise no matter what. And so, yes, we

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Speaker 3: recognize that one of the strengths of the US is

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Speaker 3: it's dynamic economy. It's it's a large economy. The per

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Speaker 3: capita income is high in the United States, and that

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Speaker 3: obviously supports the tax base. You know that that's actually

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Speaker 3: is one of the key rating strengths. But you know, uh,

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Speaker 3: it's I don't think it's enough to offset the vegitariationion

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Speaker 3: we've seen on most just still on death side.

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Speaker 1: I love for you to respond here to Treasury Secretary

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Speaker 1: Janet Yellen who said that she disagrees with your decision

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Speaker 1: and that it is based on outdated and arbitrary, based

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Speaker 1: on outdated data. I'm sorry. So, if it is indeed

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Speaker 1: base and outdated data, do you agree with that and

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Speaker 1: does that change the way that you look at the

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Speaker 1: picture moving forward?

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Speaker 3: I am I understand why she's not happy with it,

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Speaker 3: with the downgrade. That's that's that makes sense. I think

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Speaker 3: what she's referring to specifically are governance indicators that we

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Speaker 3: use from the World Bank. They come out once a year.

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Speaker 3: They tend to be a little bit backward looking. We

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Speaker 3: use it because it's we have that data for every

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Speaker 3: country in the world, and it comes out once a year,

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Speaker 3: and we're able to use it for comparison's sake and

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Speaker 3: not just say it's Fitch coming up with us. You

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Speaker 3: know this underlying governance. So yes, it's a little bit

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Speaker 3: backward looking. But I think more importantly, over the last

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Speaker 3: two decades, you've seen again an interior and even these indicators,

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Speaker 3: you know, the United States start started kind of at

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Speaker 3: the top of governance, toward the top at ninety one

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Speaker 3: percentile and now it's down to seventy eight percentile, So

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Speaker 3: again you'd see that kind of continuous contigeration over the

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Speaker 3: last two decades.

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Speaker 1: What does this mean for the risk free rate here?

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Speaker 1: If the idea here is that treasuries are not as

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Speaker 1: risk free as they had been with a gold standard

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Speaker 1: tri LA rating here, what does this mean for broader markets?

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Speaker 1: And do other countries? Do other securities face further risk

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Speaker 1: of downgrade? Given how much the treasury market had underpinned

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Speaker 1: the financial markets.

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Speaker 3: You know, I think one of the rating strengths of

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Speaker 3: the US, the other key rating strength in addition to

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Speaker 3: the dynamic economy that I mentioned earlier, is the reserve

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Speaker 3: currency status of the United States. It's unparalleled. There's no

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Speaker 3: other there's not really much of an alternative. The treasury

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Speaker 3: markets teeth and liquid, and this gives the US government

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Speaker 3: tremendous financing flexibility, and I think that is a very

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Speaker 3: key rating factor. And the other thing I would have

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Speaker 3: to mention is, you know, double A plus is the

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Speaker 3: second highest rating we have. It's not it's not a

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Speaker 3: low rating, it's not, you know, it's still a very

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Speaker 3: high rating.

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Speaker 1: It's just me.

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Speaker 3: We're just saying that we do not think that the

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Speaker 3: underlying business story and and the governance, uh, you know,

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Speaker 3: it's compatible with Triple A anymore.

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Speaker 1: The biggest inside the conversation you've been having with the

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Speaker 1: Biden administration about this, given how heavily they disputed your decision.

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Speaker 3: Well, you know, I think you know, part of the

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Speaker 3: rating process that we have across all this sovereigns that

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Speaker 3: we rade, we do, we do have conversations. We do

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Speaker 3: obviously take you know, you know, facts and figures and

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Speaker 3: and different things unto consideration when we talk to them,

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Speaker 3: and so that's not unusual. It's a similar conversation moving

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Speaker 3: out with any government.

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Speaker 1: We thank you for your time. That is Richard Francis.

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Speaker 1: He is the Fitch Ratings co head of America Sovereigns

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Speaker 1: and one of the people behind that big decision on

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Speaker 1: the US downgrade.