European rating agency Scope sends US downgrade warning

LONDON: European credit ratings agency Scope has warned that the United States could be downgraded if a lengthy trade war erodes long-term trust in the dollar, or if President Donald Trump implements even more extreme measures such as capital controls.

The fallout from Trump’s trade tariffs has included the dollar’s sharpest year-to-date fall against other major currencies in more than 50 years, while credit default swap (CDS) markets, which investors use to hedge risk, are pricing in as many as five U.S. rating downgrades.

Berlin-based Scope, which is used alongside S&P Global, Moody’s and Fitch by the European Central Bank to judge creditworthiness, said one of the most exposed countries to the trade war was the U.S. itself, particularly in more extreme scenarios.

Those include a protracted tariff fight and/or the introduction of U.S. capital controls - or taxes on foreign investment - which could then lead to “viable alternatives” to the dollar as the world’s dominant currency.

“If doubts about the exceptional status of the dollar were to increase, this would be very credit negative for the U.S.,” Scope’s head of sovereign ratings, Alvise Lennkh-Yunus, said in a report published on Tuesday.

It is the first agency to deliver such a stark warning about a possible U.S. rating downgrade in the wake of Trump’s shake-up of the post World War II global economic order.

Scope currently rates the U.S. AA with a “negative” outlook. That is lower than the AA+ scores of S&P and Fitch, and of Moody’s, which is the only major agency to still rate the U.S. a top-grade “triple A”.

Lennkh-Yunus added that doubts around the dollar’s status would be fuelled if China and the European Union deepen their trade ties; if China opens up its economy; and if the EU can convince its citizens to invest more into the bloc’s priority projects.

“These developments are unlikely to happen swiftly,” Lennkh-Yunus said.

There was a broader warning about other countries with significant trade surpluses and/or financial exposure to the U.S. too.

They include open economies like Ireland, which ride global business cycles, those sensitive to higher financing rates such as Italy, oil exporters, and countries with weak currencies like Turkey and Georgia.

“The eventual impact on growth, inflation, public debt, external credit metrics and thus sovereign credit ratings, will ultimately depend on the macro-economic environment,” Scope’s report said.