The United States’ top credit rating was on Tuesday downgraded by rating agency Fitch, stirring a ripple across markets and instigating circumspection response from investors.
Fitch downgraded the US credit rating from AAA to AA+, two months after the government resolved the debt ceiling. The rating agency cited anticipated fiscal decline over the next three years and recurring last-minute debt ceiling negotiations that jeopardize the government’s capacity to meet its financial obligations.
Credit ratings serve as a tool for investors to evaluate the risk level associated with companies and governments when they seek funding in the debt capital markets. Typically, the lower a borrower’s rating, the greater their borrowing expenses tend to be.
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The White House has expressed disappointment over the rating, saying it “strongly disagrees with this decision”.
“It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” said White House press secretary Karine Jean-Pierre.
In a statement, U.S. Treasury Secretary Janet Yellen expressed her disagreement with Fitch’s downgrade, the second major credit rating agency to lower the United States’ triple-A credit rating after Standard & Poor. Yellen called the downgrade “unjustified and founded on outdated information.”
The downgrade is believed to be a repercussion of incessant faceoffs between Republican lawmakers and President Joe Biden reaching a debt ceiling agreement. The last agreement in June, which lifted the government’s $31.4 trillion borrowing limit, was reached following months of political brinkmanship.
Fitch said repeated political standoffs and last-minute resolutions over the debt limit have eroded confidence in fiscal management.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.
Fitch initially raised concerns about a potential downgrade in May, and despite the resolution of the debt ceiling crisis in June, it reaffirmed this stance. The agency indicated its intention to conclude the review during the third quarter of this year.
In the immediate aftermath of the downgrade, traders have responded by shifting towards safe-haven assets, moving away from stocks, and redirecting their investments into government bonds and the dollar.
Some analysts quoted by Reuters agreed with Fitch that the continuous standoffs over the debt ceiling have constituted a problem for the US credit rating, while others find fault with the timing.
“This basically tells you the U.S. government’s spending is a problem,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.
“I don’t understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved,” said Wendy Edelberg, director of The Hamilton Project At The Brookings Institution in Washington D.C.
According to Michael Schulman, chief investment officer at Running Point Capital Advisors, the “U.S. overall will be seen as strong but I think it’s a little chink in our armor.”
“It is a dent against the U.S. reputation and standing,” he said.
Fitch Ratings has cut the U.S.’ long-term credit rating from AAA to AA+, citing “an erosion of governance” over the past 20 years and recurring debt limit skirmishes as contributing factors in its decision. The agency additionally warns of an “expected fiscal deterioration over the next three years.” The move, though perplexing to some experts, comes after Fitch put the U.S. on negative watch in May during the most recent debt ceiling standoff, which was ultimately resolved. The downgrade puts the U.S. in the company of New Zealand and Canada, and below AAA countries, such as Denmark and Germany.
Fitch’s ratings, along with Moody’s and S&P’s, are “closely watched by market participants and economists around the world,” notes the Financial Times. The U.S. still has a AAA rating from Moody’s; S&P’s U.S. rating is AA+. (Linkedin News)