Fitch downgrades US credit rating from AAA to AA+.
Fitch downgrades US credit rating from AAA to AA+.
Fitch Downgrades U.S. Credit Rating: A Steady Deterioration of Governance
August 1, ANBLE – In a surprising move, ratings agency Fitch downgraded the U.S. government’s top credit rating from AAA to AA+. This decision was made based on concerns regarding the expected fiscal deterioration over the next three years and the country’s high and growing general government debt burden[^1^].
Fitch’s decision to lower the credit rating comes in the wake of a debt ceiling agreement reached two months ago between Democratic President Joe Biden and the Republican-controlled House of Representatives. The agreement lifted the government’s $31.4 trillion debt ceiling after months of political brinkmanship[^1^].
According to Fitch, there has been a constant decline in governance standards over the past two decades, especially in fiscal and debt matters[^1^]. This downgrade is particularly significant since it follows a bipartisan agreement that was supposed to suspend the debt limit until January 2025[^1^]. U.S. Treasury Secretary Janet Yellen, however, disagreed with Fitch’s assessment, stating that the downgrade was “arbitrary and based on outdated data”[^1^].
Implications and Market Reactions
Credit ratings play a crucial role in assessing the risk profile of companies and governments when they raise financing in the debt capital markets. The downgrade by Fitch is likely to impact investor sentiment and borrowing costs for the U.S. government[^1^].
The announcement of the downgrade led to a slight decline in the value of the U.S. dollar against major currencies and put the stock market in a vulnerable position as it awaited the reopening of trading[^1^]. Keith Lerner, Co-Chief Investment Officer of Truist Advisory Services, described the news as unexpected, suggesting that the market is susceptible to negative developments at this point[^1^].
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It is worth noting that this is not the first time the U.S. has experienced a credit rating downgrade. In 2011, Standard & Poor’s (S&P) cut the country’s top “AAA” rating by one notch, citing political polarization and insufficient measures to address fiscal concerns. Despite the downgrade, S&P’s rating for the U.S. remains at “AA-plus,” the second-highest rating[^1^].
The 2011 downgrade had a significant impact, causing U.S. stock markets to tumble and creating ripple effects across global stock markets. This occurred concurrently with the financial turmoil in the eurozone, leading to a paradoxical rise in U.S. Treasuries prices as investors sought safer havens[^1^].
Earlier this year, Fitch had already placed its “AAA” rating on U.S. sovereign debt on watch for possible downgrade, citing risks such as political brinkmanship and the growing debt burden[^1^].
Conclusion
Fitch’s downgrade of the U.S. credit rating reflects concerns over the country’s fiscal trajectory and governance standards. The implications of this downgrade extend beyond the financial markets, influencing borrowing costs for the U.S. government and investor sentiment. While it remains to be seen how the market will react, it is clear that the U.S. economy is at a vulnerable stage where bad news can have substantial consequences[^1^].
