A Warning About U.S. Credit Rating Could Signal Higher Interest Rates

Credit Rating

A major credit rating agency is warning that it will reconsider the nation’s AAA rating if the partial U.S. government shutdown continues into March and raises doubts about the ability of Congress to lift the debt ceiling.

A downgrade of the nation’s pristine credit rating could lead to higher borrowing costs for the U.S. Treasury, companies and consumers.

A number of government agencies have not been funded since Dec. 21 amid President Trump’s insistence that Congress provide $5.7 billion for a wall along the border with Mexico.

With a total debt of nearly $22 trillion and rising, the government’s borrowing limit must be periodically raised by Congress. The next time is in March, although the Treasury could extend that deadline by taking “extraordinary measures” (juggling its books).

Fitch, one of three major credit rating agencies, warned Wednesday that uncertainty created by the 2 1/2-week shutdown could lead to doubts about whether lawmakers will be able to agree on raising the debt ceiling.

“If this shutdown continues to March 1 and the debt ceiling becomes a problem several months later, we may need to start thinking about the policy framework, the inability to pass a budget … and whether all of that is consistent with triple-A,” James McCormack, Fitch’s global head of sovereign ratings, said in London, according to Reuters. “From a rating point of view it is the debt ceiling that is problematic,” he added.

Credit Rating

The only previous downgrade for the U.S. government occurred in 2011, when Standard & Poor’s lowered its long-term credit rating to AA-plus. S&P cited the government’s inability to get its fiscal house in order.

In an interview with CNBC Wednesday, McCormack said that with projected deficits continuing, “you can see debt levels moving higher, you can see the interest burden in the U.S. government moving decidedly higher over the next decade.

“So there needs to be some kind of fiscal adjustment to offset that or the deficit itself moves higher and you’re essentially borrowing money to pay interest on the debt,” he said. “So there is a meaningful fiscal deterioration going on in the United States.”

Failure to raise the ceiling means “that the government won’t borrow more to pay its bills — but it will still have those bills,” NPR’s Ron Elving and Danielle Kurtzleben explained. “This is money that is set to be spent anyway — paychecks, benefit checks, outlays to contractors. Those obligations don’t go away if Congress doesn’t raise the debt ceiling.”

SpaceX To Lay Off 10 Percent Of Its Workforce

SpaceX

SpaceX, the pioneering space technology company led by Elon Musk, will lay off about 10 percent of its more than 6,000 employees.

The news was first reported by the Los Angeles Times:

SpaceX, citing a need to get “leaner,” said Friday it will lay off about 10% of its roughly 6,000 employees.

The cuts were cited in an email sent to employees by President Gwynne Shotwell, which was provided to The Times. “This was a very difficult but necessary decision,” Shotwell wrote.

“To continue delivering for our customers and to succeed in developing interplanetary spacecraft and a global space-based internet, SpaceX must become a leaner company,” the Hawthorne-based company said in a statement. “Either of these developments, even when attempted separately, have bankrupted other organizations. This means we must part ways with some talented and hardworking members of our team.”

Even with SpaceX’s ramp-up of satellite launches — 21 in 2018, up from 18 the year before, and on Friday the first one of this year — it has occasionally cut its workforce. Last summer, the company fired some senior managers at the company’s Redmond, Wash., office because of disagreements over the pacing of the development and testing of its Starlink satellite program.

SpaceX makes most of its money from commercial and national security satellite launches, as well as two NASA contracts, one a multibillion-dollar deal to deliver cargo to the International Space Station and the other up to $2.6 billion to develop a capsule that will deliver astronauts to the space station. The first launch of that capsule, without a crew, is planned for February.

The Elon Musk-led company has even more ambitious — and expensive — plans. Musk has said SpaceX will conduct a “hopper test” of its Mars spaceship prototype as early as next month. The production version of that spaceship and its rocket system is expected to cost billions.

Earlier this month, privately held SpaceX said it raised about $273 million in equity and other securities in an offering that sought to raise about $500 million, according to a filing with the Securities and Exchange Commission. The company is worth $31 billion, according to Equidate, which tracks private-company valuations.

In May, Shotwell told CNBC that the company is profitable and has had “many years” of profitability.

SpaceX

SpaceX is offering a minimum of eight weeks’ pay and other benefits to laid-off workers, according to Shotwell’s email. The company will also provide assistance with career coaching, resume help and job searches.

In a statement, a company spokesman confirmed the layoff without specifying how many employees will be released.

“To continue delivering for our customers and to succeed in developing interplanetary spacecraft and a global space-based Internet, SpaceX must become a leaner company,” said the statement. “This means we must part ways with some talented and hardworking members of our team. … This action is taken only due to the extraordinarily difficult challenges ahead and would not otherwise be necessary.”

A company source says SpaceX remains financially strong and can continue to “manufacture and launch at a reliable cadence in the years ahead.”

This year the company also will begin “test hops” of Starship, a prototype designed for human travel to Mars, according to the source.