Fitch, the profound and major independent credit rating agencies of the US has downgraded the credit rating of the US govt. The downgrade comes as a result of concerns regarding the state of the country’s finances and its heavy debt burden. Fitch reduced the rating from the top-level AAA to a notch lower at AA+.
A “steady deterioration” was quoted by the agency for the contributing factor of governance over the past 20 years. In response to the downgrade, US Treasury Secretary Janet Yellen criticized the decision, deeming it “arbitrary.” She argued that it was based on “outdated data” from the period spanning 2018 to 2020.
Credit ratings are significant for investors, as they serve as a benchmark for evaluating the risk associated with lending money to a government. The size and relative stability, makes US a major secure investment, because of its economy. However, this year witnessed another round of political brinkmanship over government borrowing.
In June, the government successfully raised the debt ceiling to $31.4 trillion (£24.6 trillion), but only after a prolonged political battle that threatened the country with defaulting on its debts. As Congress returns from its summer recess, lawmakers face the task of reaching an agreement on next year’s budget before the end of September to prevent a government shutdown.
Fitch stated that the rating downgrade reflects the anticipated fiscal deterioration over the next three years, a high and increasing general government debt burden, and erosion of governance compared to peers. The agency noted that despite the June bipartisan agreement to suspend the debt limit until January 2025, there has been a consistent decline in governance standards over the past two decades, particularly concerning fiscal and debt matters.
US Treasury Secretary Janet Yellen firmly disagreed with Fitch’s decision, asserting that “Treasury securities remain the world’s preeminent safe and liquid asset, and the American economy is fundamentally strong.”
The timing and rationale behind the downgrade have taken many economists by surprise. Former US Treasury Secretary Larry Summers described Fitch’s decision as “bizarre and inept,” especially considering that the US economy “looks stronger than expected,” as he shared in a post on Twitter (now known as X).
Mohamed El-Erian, the chief economic adviser at financial services giant Allianz, characterized the Fitch announcement as “a strange move.” He expressed the belief that the announcement is more likely to be disregarded than to have a lasting disruptive impact on the US economy and markets, as he posted on the Threads social media platform.
Fitch also predicts that the US will slide into a mild recession later this year. However, Nobel Prize-winning economist Paul Krugman asserted that “the biggest economic news over the past year has been America’s remarkable success at getting inflation down without a recession.” Alec Phillips, the chief US political economist at Wall Street bank Goldman Sachs, stated that “The downgrade mainly reflects governance and medium-term fiscal challenges but does not reflect new fiscal information.”
Jason Furman, an economic adviser to former US President Barack Obama, was among those questioning the timing of the Fitch announcement, calling it “completely absurd.”