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A contested election could cost America its AAA credit rating

Posted October 13, 2020 12:02 p.m. EDT

— A messy election could harm more than just faith in democracy — it could also cost the United States its perfect credit rating.

Fitch Ratings wrote in a report Monday that it will closely monitor the US presidential election for "any departure" from America's history of orderly transfers of power.

The United States has a perfect AAA credit rating from Fitch in part because of its track record for strong governance, including "well-understood rules and processes for the transfer of power," the report said.

"Fitch would view a departure from this principle negatively in considering the US rating," the credit ratings firm said.

In other words, a very messy election could cost the United States its AAA credit rating from Fitch.

A downgrade could cause an erosion of confidence among investors, potentially setting off turbulence in financial markets. It could also make it more expensive for the United States to finance its mountain of debt. In July, Fitch lowered its outlook on the United States to negative in part because of the "ongoing deterioration" in the nation's public finances — and the lack of a plan to address it.

Fitch said that it will be monitoring for signs that the election results will be "broadly accepted" and that there will either be an "orderly retention or transition of power" on January 20, 2021.

The fact that a major credit ratings firm even has to issue such a warning about one of the hallmarks of democracy underscores the deepening political divide in the United States and nervousness on Wall Street about the election. A contested election is the most commonly cited concern among portfolio managers surveyed by RBC Capital Markets, surpassing even worries about the economy and the pandemic.

JPMorgan Chase CEO Jamie Dimon expressed confidence Tuesday in the ability to get through the election.

"I have great faith in this country and I'm sure we'll have a proper election," Dimon told reporters during a conference call in response to a question about doubts over election results.

Fitch: Election uncertainty could last for weeks

For months, investors have been bracing for post-election chaos that could rattle financial markets. Those worries have been amplified by President Donald Trump's baseless claims that the election is "rigged" because of unfounded concerns about mail-in ballots.

But the International Monetary Fund, which downgraded its 2021 global economic forecasts, isn't expecting election fireworks.

"Our assumption for the US is that there will be no serious disruption during the elections or after the elections," Gita Gopinath, the IMF's chief economist, said during a news conference Tuesday. "This is supposed to take place like any other previous election in the US. Of course, if that is not the case and there is heightened political uncertainty and disruptions that obviously would be a downside risk to the forecast."

Still, Fitch said that the popularity of mail-in voting because of the pandemic means that uncertainty over the winner of the election "could conceivably last for weeks" after the November 3 election.

"The challenges surrounding the voting process increase the likelihood that results at a state or national level will be disputed by one or both of the candidates or party organizations," the report said.

'Deepening political polarization'

Of course, there is a precedent for a messy election. The 2000 recount lingered for five weeks, driving down the S&P 500, before being halted by the US Supreme Court. Former Vice President Al Gore eventually conceded to George W. Bush, who was sworn in as the 43rd US president weeks later.

"The disputed 2000 presidential election did not weaken investor trust in the US," Fitch said.

In 2011, S&P Global Ratings took the unprecedented step of downgrading the US credit rating because of the brinksmanship over raising the debt ceiling. However, the other two major credit ratings firms, Fitch and Moody's, kept their AAA ratings on the United States.

Fitch noted that the debt limit disputes of 2011 and 2013 as well as recurring government shutdowns have had a "limited impact" on trust in the United States.

The United States entered the pandemic with the highest debt of any AAA-rated government. And the latest projections indicate that US debt is now larger than the entire size of the economy — the first time that has happened since just after World War II.

"The potential for a disputed election result reflects deepening political polarization," Fitch wrote, "which could affect the next administration's policymaking scope and how it approaches public policy decision making on key issues."

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