Fitch Ratings downgraded the United States’ sovereign credit grade from AAA to AA+ as the nation faces ballooning fiscal deficits and an erosion of governance.
The rating agency expressed concerns over the country’s mounting budget deficits resulting from tax cuts, new spending initiatives, and various economic shocks.
Also, Fitch stated that medium-term challenges related to rising entitlement costs remain largely unaddressed.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” stated Fitch in an official statement.
Treasury Secretary Janet Yellen swiftly responded to the downgrade, dismissing it as “arbitrary” and “outdated.”
Yellen assured investors that despite the downgrade, Treasury securities remain the world’s preeminent safe and liquid asset, and the American economy remains fundamentally strong.
However, Fitch had already warned about the possibility of downgrading the US credit grade back in May when lawmakers were at odds over raising the nation’s borrowing limit, creating concerns about potential cash flow disruptions.
The downgrade by Fitch is seen as a reflection of the nation’s rapidly swelling debt burden. Fitch predicts that the US debt-to-GDP ratio will reach 118% by 2025, more than two-and-a-half times higher than the median for ‘AAA’ rated countries, which stands at 39.3%.
The rating agency also warned that the debt burden is likely to rise even further in the longer-term, making the US more vulnerable to future economic shocks.
The news of the downgrade surprised many economic commentators, with some, like Mohamed El-Erian and former Treasury Secretary Larry Summers, expressing confusion and disagreement with Fitch’s decision, especially given the current strength of the US economy.
As the announcement was made, yields on two-year Treasuries fell slightly in Asia trading, while those on 10-year US bonds edged higher. The dollar also dipped against major currencies like the euro and yen.
The downgrade may pose challenges for funds or index trackers with a AAA-only mandate, as they may need to adjust their holdings due to the new AA+ rating. However, Moody’s Investors Service still maintains a top-grade Aaa rating for the US sovereign.
Democrats in Congress took the opportunity to blame Republicans for the downgrade, citing the debt ceiling crisis earlier in the year as the root cause of the downgrade. Meanwhile, House GOP campaign spokesman Jack Pandol attributed the downgrade to “Bidenomics.”
