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Fitch Ratings has cut the US debt rating from triple A to double A plus, citing worsening fiscal conditions and governance, two months after political brinkmanship brought the world’s largest economy to the edge of a sovereign default.
The rating agency on Tuesday said its downgrade reflected “expected fiscal deterioration over the next three years” and “a high and growing general government debt burden”. Fitch also noted an “erosion of governance” over the past two decades “that has manifested in repeated debt limit stand-offs and last-minute resolutions”.
Washington narrowly avoided a default projected for June after legislators and the White House reached a deal to raise the federal borrowing limit at the eleventh hour. Fitch in late May had warned of a possible downgrade, pointing to “increased political partisanship that is hindering reaching a resolution”.
Fitch is one of three major rating agencies whose views are closely watched by market participants and economists around the world. Moody’s still maintains a triple A rating on the US, while S&P slashed its own rating to double A plus in 2011 after an earlier debt ceiling showdown.
Markets for US Treasury bonds and the dollar index, which measures the US currency against a basket of six other currencies, were little moved by the news. The US stock market had closed before Fitch announced its downgrade.
Janet Yellen, the US Treasury secretary, said she strongly disagreed with Fitch, calling the rating change “arbitrary and based on outdated data”.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,” Yellen said.
Economist Lawrence Summers, a Treasury secretary in the Clinton administration, also criticised the announcement. “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.
Fitch also cited a growing US debt burden as a concern. The agency expects the general government deficit to rise to 6.3 per cent of gross domestic product in 2023, up from 3.7 per cent in 2022, “reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden”.
Growth in the US will be hampered, Fitch said, by a recession it projected for the fourth quarter of 2023 and first quarter of 2024.
Lower credit ratings typically increase a country’s borrowing costs in debt markets. It is not clear that will be the case in this instance, however. After S&P took away its triple A rating for the US, there was little long-term effect on markets.
“The US credit rating is singular — there is no general methodology for rating the world’s pre-eminent safe haven asset,” said Edward Al-Hussainy, a senior analyst at Columbia Threadneedle.
“Fitch is attempting to send a signal about the debt ceiling process and the current fiscal trajectory. Both are views on the US politics rather than policy,” he added.