Fitch forced into defense mode after backlash over U.S. credit rating downgrade

Fitch forced into defense mode after backlash over U.S. credit rating downgrade

Decline of the American Creditworthiness Signals a Need for Change

In a shocking move, Fitch Ratings has downgraded the long-term credit rating of the United States from AAA to AA+. This decision, as explained by Richard Francis, co-head of Americas sovereign ratings at Fitch, was driven by the nation’s soaring debt levels relative to its GDP and the lack of concerted action from its political class to address these issues¹. As a result, the United States can no longer be regarded as the gold standard for creditworthiness.

The United States’ debt-to-GDP ratio has skyrocketed to 113% from below 60% in 2007, with no sign of stabilization in the near future². Despite claims that the economy has outperformed expectations, Fitch predicts a recession beginning in the fourth quarter, making arguments against the downgrade less compelling³. Even if a soft landing is engineered, it will not be enough to offset the ongoing decline in the country’s fiscal and governance status⁴.

Fitch’s decision did not come as a surprise to some. Richard Francis himself stated that certain financial metrics of the US government had already dropped below even a double-AA rating. The only factor that had prevented an earlier downgrade was the US dollar’s status as the global reserve currency. This status enables the country to borrow cheaply from foreign investors, who require US dollars for international trade and commerce⁵.

Unsurprisingly, the Biden administration strongly disagreed with Fitch’s assessment. Treasury Secretary Janet Yellen criticized the decision, calling it “arbitrary” and “entirely unwarranted” and questioning her management of the country’s finances⁶. Other prominent figures such as Larry Summers also dismissed the downgrade as questionable⁷. However, Fitch argued that the decision had been telegraphed since May, indicating that the warning signs had been present for some time⁸.

While the brinkmanship surrounding the debt ceiling played a role in Fitch’s decision, the increasing failure of politicians to tackle meaningful reforms was a major factor⁹. Both Republicans and Democrats have been unable to address key issues such as entitlement programs like social security and Medicare¹⁰. This failure to take action undermines the country’s long-term fiscal health and raises concerns about its governance¹¹.

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The downgrade could also have unintended consequences. Mohamed El-Erian, an independent financial expert, expressed worry that it could exacerbate the political divides already present in the country, potentially affecting the upcoming 2024 election¹². Moreover, the downgrade plays into the hands of adversaries such as Russia, who seek to diminish the influence of the US dollar in an effort to weaken America’s global standing¹³.

Although Fitch’s downgrade is noteworthy, it is not unprecedented. Moody’s is now the only major credit rating agency that still maintains a AAA rating for the US federal government, while Standard & Poor’s downgraded it in 2011¹⁴. Credit rating agencies, in general, have faced criticism since their failure to predict the global financial crisis¹⁵. Their questionable practices, such as assigning investment-grade ratings to subprime mortgages, have eroded trust in their assessments¹⁶.

In an attempt to ease market concerns, Richard Francis tried to downplay the significance of the downgrade. He highlighted that AA+ is still the second-highest rating and acknowledged that the underlying fiscal story and governance in the United States are no longer compatible with a AAA rating¹⁷. While this may provide some reassurance, the impact of the downgrade should not be underestimated.

Overall, Fitch’s decision to downgrade the United States’ credit rating serves as a wake-up call. It signifies the urgent need for the country’s policymakers to address its escalating debt levels and make meaningful reforms. Failure to do so will have serious implications for the country’s economic stability and global influence. It is essential for the United States to regain its financial credibility and restore confidence in its economic future.