Editor's Note: CoStar News is kicking off a new feature called Person of the Week, highlighting someone whose actions, statements or issues affected the commercial real estate industry. If you'd like to nominate someone for consideration, please email news@costar.com.
On Aug. 1, Fitch Ratings said it downgraded the nation’s long-term debt rating to "very high credit quality" from "highest credit quality." While the switch might appear minor, its impact on the cost of borrowing money could be significant, and the change quickly had major implications for the bond market and mortgage rates. For these reasons, the analyst behind the downgrade is the Person of the Week.
WHO: Richard Francis, co-head of sovereign ratings for the Americas for Fitch Ratings.
STREET CRED: Francis has worked at Fitch for more than seven years and prior to that spent 14 years at rival Standard & Poor's. He's also been a research economist at Morgan Stanley. He has a master's degree from Columbia University’s School of International and Public Affairs in New York City and a bachelor's degree from Rice University in Houston.
WHAT HAPPENED? On Aug. 1, Fitch Ratings said it downgraded the long-term debt rating of the United States to AA+ from AAA, meaning the country no longer had the highest credit quality rating from the agency. That day, the interest rate for a 30-year fixed mortgage increased 0.06%, to 7.10%, and 15-year fixed went up 0.07%, to 6.45%, according to Mortgage News Daily's Rate Index. In explaining its decision, Fitch said it expected to see fiscal deterioration in the United States over the next three years as the government's already high debt burden rises further and lawmakers show little willingness or ability to resolve their differences over critical budget and spending issues.
WHAT FRANCIS SAID: During an appearance on CNBC's "Squawk on the Street," he said the time was right to lower the country's credit rating. "Honestly, this is a steady deterioration that we’ve seen in some on the key metrics for the United States for a number of years," Francis said. The government's general debt to gross domestic product, or GDP, ratio is just too high at more than 100%, he said. In 2007, it was less than 60%.
HOW OTHERS RESPONDED: Reaction was swift. Treasury Secretary Janet Yellen questioned the timing of the announcement when much of the justification for it was based on issues that are not new. Jamie Dimon, the CEO of financial powerhouse J.P. Morgan told CNBC the downgrade would ultimately have little effect, given the dollar's status as the world's reserve currency. Many cited the resilience the United States showed after another ratings agency, Standard & Poor's, lowered its rating on U.S. debt in 2011. Former Harvard President Larry Summers, a well-respected economist tweeted that while the U.S. does face "long-run fiscal challenges," Fitch's downgrade "is bizarre and inept" because the economy actually appears to be stronger than expected. The Dow Jones Industrial Average dropped 300 points.
WHAT'S NEXT? The U.S. can get its credit ranking back to the highest level, but it won't be easy, Francis said. It would take figuring out a long-term solution to funding entitlement programs such as Social Security and Medicare and at least stabilizing the debt-to-GDP ratio. Also, the government needs to suspend or eliminate the debt ceiling that's caused a real rift between Republicans and Democrats. "That would really help as well because the idea that the United States reaches the next stage and all of a sudden cannot pay its bills, again, we don’t think that’s consistent with a AAA either," Francis said.