Fitch informed Treasury about the Jan. 6 insurrection before US downgrade
Fitch informed Treasury about the Jan. 6 insurrection before US downgrade
Fitch Downgrades US Credit Rating: What Does it Mean?
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In a surprising move, Fitch Ratings has downgraded the credit rating of the United States from AAA to AA+. This decision, according to Richard Francis, a senior director at Fitch Ratings, was driven by concerns over the nation’s fiscal health, deterioration in governance, and political polarization, with the January 6 insurrection serving as a visible manifestation of these issues.
Fitch’s decision to downgrade the US credit rating reflects several underlying concerns. Firstly, there is a perceived deterioration in US governance, which undermines confidence in the government’s ability to address fiscal and debt issues. The agency points to the Jan. 6 insurrection as evidence of this deterioration, highlighting it as a reflection of the country’s overall governance crisis.
Furthermore, political polarization in the United States has reached alarming levels, with both parties moving further away from the center. This increasing division makes it difficult to find common ground and compromises on crucial fiscal matters. Francis acknowledges that the blame for the fiscal situation cannot be assigned solely to one party, as both Democrats and Republicans have contributed to this polarization.
Fitch’s downgrade comes a decade after Standard & Poor’s (S&P) made a similar move in 2011. Back then, S&P cited heightened political polarization and insufficient measures to address the nation’s fiscal challenges as the reasons for downgrading the US credit rating. The recent decision by Fitch has drawn criticism from US Treasury Secretary Janet Yellen, who called it arbitrary and based on outdated data. White House economic adviser Jared Bernstein also criticized the timing of the downgrade, describing it as bizarre and arbitrary.
When asked about the timing of Fitch’s decision, Francis explained that the agency wanted to thoroughly assess long-standing concerns regarding governance and the country’s debt profile. The decision to downgrade was primarily driven by the worsening debt profile of the United States, which has been a growing issue over the past few years. Francis points out that higher interest rates will further burden the country’s debt sustainability.
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The debate surrounding the debt ceiling is another factor contributing to the downgrade. The political brinkmanship and polarization surrounding this issue have occurred every two years since 2011, creating further uncertainty and jeopardizing the government’s ability to fulfill its financial obligations. Although the latest debt ceiling suspension will last until early 2025, the potential for future debates and political grandstanding looms.
For the United States to regain its top rating, several factors need to be addressed. One crucial aspect is stabilizing the debt-to-GDP ratio and possibly considering a permanent suspension of the debt ceiling. However, Francis does not foresee any significant downgrades resulting from a potential government shutdown in the near future. Such an event would only underscore the existing political polarization and governance crisis.
Fitch’s decision to downgrade the US credit rating serves as a wake-up call, urging policymakers to address the nation’s fiscal challenges and bridge the growing divide between the two major political parties. It emphasizes the urgent need for bipartisan solutions and a more stable and effective governance framework. As the United States faces economic uncertainties and mounting debt, it is essential to reassess fiscal strategies and take collective action to secure a brighter financial future.
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