By Emel Akan
The United States has taken a major hit as Fitch Ratings has lowered its Long-Term Foreign-Currency Issuer Default Rating for the country from AAA to AA+.
The U.S. credit rating has been lowered because of “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” over the past two decades, according to the credit rating agency.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch stated.
“In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”
The move implies that U.S. government bonds are a riskier investment than they were previously and increases the cost of government borrowing as a result.
Fitch forecasts that the general government deficit will climb to 6.3 percent of GDP in 2023, up from 3.7 percent in 2022, due to cyclically lower federal revenues, new spending initiatives, and a greater interest burden.
In May, the agency placed the country’s rating on negative watch, citing the debt ceiling debate in Washington. According to the latest report, the negative watch was lifted and a stable outlook was assigned.
Since this is the first time a major ratings agency has downgraded the United States in more than a decade, the move has caused quite a stir.
“We strongly disagree with this decision,” White House press secretary Karine Jean-Pierre said in a statement.
“The ratings model used by Fitch declined under President Trump and then improved under President Biden, and 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. And it’s clear that extremism by Republican officials—from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations—is a continued threat to our economy.”
‘Bizarre and Inept’
Larry Summers, the Treasury Secretary under President Bill Clinton, reacted to the Fitch rating’s decision on Twitter.
“The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept,” he wrote on Twitter.
“I am very puzzled by many aspects of this announcement, as well as by the timing,” economist Mohamed A. El-Erian stated also on Twitter.
“I suspect I won’t be the only one. The vast majority of economists and market analysts looking at this are likely to be equally perplexed by the reasons cited and the timing. Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the US economy and markets.”
U.S. equity futures fell after the downgrade announcement.
“Today’s downgrade should be a wake-up call – we need to get our country’s fiscal and political house in order,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote in a statement. “The United States economy remains strong, but we are on an unsustainable trajectory.”
Treasury Secretary Janet Yellen also issued a statement, calling the Fitch’s decision “outdated.”
“The change by Fitch Ratings announced today is arbitrary and based on outdated data. Fitch’s quantitative ratings model declined markedly between 2018 and 2020 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision,” Ms. Yellen said in the statement.
“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”