Fitch US downgrade followed protocols

Fitch US downgrade followed protocols

The Timing and Controversy Behind Fitch’s U.S. Credit Rating Downgrade

Fitch Ratings Downgrades US Credit Rating

In a surprising move, Fitch Ratings downgraded the U.S. credit rating, sparking controversy and criticism from the Biden administration. The decision, which caught many off guard, has prompted heated debates and important discussions regarding the state of the U.S. economy and its long-term fiscal challenges.

Fitch’s downgrade, which has been criticized as “bizarre” and “ridiculous” by figures such as Larry Summers of Harvard and Jamie Dimon of JPMorgan, has raised questions about its timing. However, it’s important to note that Fitch’s assessment of the U.S. credit rating was not a spur-of-the-moment decision. ANBLE’s reporting reveals that Fitch followed an established process, involving U.S. officials at various stages of the assessment. The U.S. Treasury was even notified about the downgrade 24 hours prior to the announcement.

The concerns leading up to the downgrade were not new. In May, Fitch placed the U.S. AAA rating on credit watch-negative, highlighting issues such as debt ceiling brinkmanship and a lack of meaningful action in addressing long-term fiscal challenges. Fitch’s decision to downgrade was driven by a desire to thoroughly examine governance and the U.S. debt profile.

Despite the bipartisan debt deal reached in June, Fitch continued to express worry about debt ceiling brinksmanship, a broken budget process, and rising debt levels during discussions with U.S. Treasury officials. It’s worth noting that these discussions did not include the actual downgrade decision. Fitch provided the Treasury with a press release of the downgrade, allowing them time to review and respond before the announcement.

Addressing concerns about the timing, Richard Francis, a senior director at Fitch, explained that the timing was coincidental and predetermined. The downgrade committee was held before the announcement, providing the authorities 24 hours to respond and publish after the markets had closed.

One of the key factors leading to the downgrade was Fitch’s indication of an erosion of governance. This included repeated debt limit standoffs and a lack of progress in tackling medium-term fiscal challenges such as rising Social Security and Medicare costs. The Biden administration perceives this as unfair, arguing that this time, the debt ceiling was successfully resolved with over $1 trillion of deficit reduction. They believe that Fitch should view this resolution as a positive sign.

The Jan. 6 insurrection at the U.S. Capitol also played a role in Fitch’s assessment of eroded governance. Biden administration officials complain that Fitch repeatedly brought up this event in meetings, which they believe skewed the judgment.

While there are controversies surrounding the timing of Fitch’s downgrade, it’s important to recognize the longer-term issues they have raised. Mark Sobel, former Treasury official and U.S. chairman of financial think-tank OMFIF, suggests that Fitch isn’t revealing anything new. The U.S. debt sustainability in the near term may be buoyed by the dynamic U.S. economy, but there is a concern about the lack of political will to make the necessary sacrifices for sustainable fiscal policies on both the spending and revenue sides.

In conclusion, Fitch’s decision to downgrade the U.S. credit rating has sparked controversy and debate over the timing and underlying concerns. While the Biden administration argues against the downgrade, long-standing and critical issues regarding governance, debt levels, and fiscal challenges have resonated with experts. It remains to be seen how this downgrade will impact the U.S. economy and whether it will serve as a wake-up call for policymakers to address these pressing issues.