Fitch Ratings has downgraded the United States’ credit rating from AAA to AA+ due to concerns over the nation’s finances and rising deficits.
The Backdrop: The downgrade is a consequence of growing worries about rising deficits and the nation’s political brinkmanship, which jeopardizes its ability to pay debts.
* This downgrade occurs two months after an agreement was reached between the Biden administration and House Republicans to suspend the government’s debt ceiling, and stave off a potentially disastrous federal default.
* In 2011, a similar standoff resulted in S&P downgrading the U.S.’s AAA rating. Presently, Moody’s Investors Service is the only major credit rating agency that still gives the U.S. a AAA rating.
What Fitch Is Saying: Fitch acknowledged the U.S. economy’s strength and the advantages of the dollar being the world’s leading currency.
* However, the agency pointed to accumulating deficits and an apparent unwillingness from both political parties to tackle long-term fiscal issues.
* The agency further cited “a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters,” as well as “repeated debt-limit political standoffs and last-minute resolutions” as reasons for eroding confidence in fiscal management.
Government Reaction: The Biden administration has pushed back against the downgrade, with Treasury Secretary Janet Yellen describing Fitch’s decision as “arbitrary” and based on outdated information.
* Yellen asserts that despite the downgrade, Treasury securities remain a prime safe and liquid asset worldwide, and the U.S. economy fundamentally remains strong.
The Long-Term Challenges: Fitch observed that the spending limits from the recent debt deal covered only a small portion of the overall budget and failed to address enduring challenges such as financing Social Security and Medicare for the aging U.S. population.
* There has been a steady rise in government deficits owing to tax cuts and increased government spending. This, coupled with rising interest rates, has escalated the cost of covering the deficit gap.
Financial Implication: U.S. government bonds have been considered secure investments for nearly a century, largely due to the perceived certainty that the country would not default on payments.
* The popularity of Treasury securities with companies and countries globally has been buoyed by this reputation. However, repeated debt ceiling stand-offs have strengthened concerns of a potential first-time default by the U.S.
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