WASHINGTON: Fitch downgraded the United States’ excellent credit rating by one point and attributed the action to the nation’s mounting national debt and an “erosion of governance” resulting from the ongoing debt ceiling disputes.
The White House’s press secretary, Karine Jean-Pierre, blasted the decision to downgrade the US from AAA to AA+, claiming it “defies reality.”
In a separate statement, Treasury Secretary Janet Yellen stated that she “strongly” disagreed with Fitch and that the revision was “arbitrary and based on outdated data.”
It is a major ratings agency’s first downgrading of this nature in more than ten years. 2011’s debt limit deadlock led S&P to downgrade Washington’s AAA rating, which sparked resentment from both parties.
According to Fitch Ratings on Tuesday, “the rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” compared to peers.
It also mentioned that a steady prognosis had been given. Yellen claimed that despite a deterioration in its quantitative ratings methodology between 2018 and 2020, Fitch delayed reporting its modification until now.
She stated that the American economy is fundamentally sound and that US Treasury securities remain the world’s most reliable and liquid asset. While raising the US debt ceiling, which restricts government borrowing to cover existing debt, was once routine, it has now evolved into a divisive party issue.
Minimal long-term effects?
According to Mickey Levy of Berenberg Capital Markets, a “clear short-run implication” of the downgrading includes:
– Increased bond rates.
– A probable sell-off in the stock market.
– A drop in the dollar’s value.
Even if it could prompt some investors to cut back on their exposure to Treasury securities in the short term, he does not anticipate long-term consequences.
Levy emphasized that the growing debt problem is widely known.
Oxford Economics’ principal US economist John Canavan does not believe the Fitch decision will have a “lasting market impact.” He told AFP that the S&P downgrade from more than a decade ago had already broken the dam on this front and that that choice had minimal long-term impact.
However, he warned that “psychological support for dollar-denominated debt” may suffer, interfering with Treasury auctions when it has to increase the volume of issuance.
“Continuous deterioration”
A settlement to raise or extend the debt ceiling in advance of a deadline was impeded by growing political polarization, which is why Fitch had placed the country’s credit on “rating watch negative” in May.
While lawmakers came to a cross-party compromise to escape a disastrous default, Fitch maintained the US on negative watch in June. “In Fitch’s view, over the last 20 years, there has been a steady deterioration in governance standards, including on fiscal and debt matters,” the agency stated on Tuesday.
Fitch continued, “The recurrent political battles over the debt ceiling and last-minute agreements have eroded confidence in fiscal management.”
Furthermore, it said that the US government “lacks a medium-term fiscal framework” and has made “limited progress” in addressing issues connected to escalating social security and Medicare expenses as the population ages.
Hard-right Republicans, who made up the bulk of the slim Republican majority in the House of Representatives this year, used the debt ceiling vote to leverage Vice President Joe Biden to accept budget cuts to some Democratic spending initiatives.
It set off a political strength test that threatened to devolve into mayhem before the two sides could negotiate a compromise. Source
