Tuesday, October 3, 2023

Fitch Downgrades US Credit Rating to AA+ from AAA

Fitch Ratings has downgraded the United States’ long-term foreign currency issuer default rating to AA+ from AAA on Tuesday, citing “expected fiscal deterioration over the next three years,” along with an erosion of governance and a growing general debt burden.

Fitch had placed the country’s rating on negative watch in May, citing the debt ceiling fight in Washington, which was eventually resolved after weeks of negotiations.

Fitch noted that the growing U.S. debt burden is a concern. The agency expects the total government deficit to rise to 6.3 percent of gross domestic product (GDP) by 2023 from 3.7 percent in 2022, “reflecting cyclical weakening federal revenues, new spending plans and more high interest burden”.

In addition, according to people familiar with the matter, Fitch also told the Biden administration that the “Capitol Hill incident” in January 2021 is also an important factor affecting the rating because it reflects the instability of the US regime.

Fitch is one of three rating agencies closely watched by market participants and economists around the world. Moody’s is maintaining its AAA rating on the US, while S&P has downgraded it to AA+ following the 2011 debt-ceiling wrestling. The US Treasury’s borrowing costs rose by USD 1.3 billion in 2011, according to a report by the US Government Accountability Office (GAO).

Fitch’s decision to downgrade the rating was criticized by US Treasury Secretary Janet Yellen. She said that the decision was arbitrary and based on old data. “Fitch’s quantitative ratings model declined markedly between 2018 and 2020, and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision,” Yellen said.

The report pointed out that a lower credit rating usually increases a country’s borrowing costs in the debt market. However, it is unclear whether this will be the case.

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