The credit rating of the US government has been downgraded due to concerns about the country’s finances and debt load. Fitch, one of the three main independent agencies that evaluate creditworthiness, downgraded the rating from AAA to AA+.
Fitch noted a steady deterioration in governance over the previous two decades. Secretary of the US Treasury Janet Yellen termed the downgrade arbitrary.
She stated that it was based on outdated data from 2018 to 2020. Investors use credit ratings as a yardstick for determining the risk associated with lending money to a government. Due to the scale and relative stability of its economy, the United States is typically viewed as a highly secure investment destination.
This year, however, witnessed another round of political brinkmanship regarding government borrowing. The government was able to raise the debt ceiling to $31.4 trillion (£24.6 trillion) in June, but only after a protracted political battle that threatened to force the country into default.In order to avoid a government shutdown, lawmakers must reach an accord on next year’s budget by the end of September following their return from the summer recess.
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Reflecting Fiscal Deterioration, Rising Debt, and Erosion of Governance Standards
In a press release, Fitch said the United States’ rating downgrade represents the expected fiscal deterioration over the next three years, an excessive and rising general government debt burden, and the erosion of governance relative to its peers. The rating agency stated that, despite the June bipartisan agreement to suspend the debt ceiling until January 2025, there has been a continuous decline in governance standards over the past two decades, including in fiscal and debt matters.
Ms. Yellen stated that she strongly disapproved of Fitch’s decision. She said in an announcement that treasury assets remain the world’s premier secure and liquid asset, and the American economy is fundamentally strong. The timing and reasoning behind the downgrade have surprised many economists. Former US Treasury Secretary Larry Summers described Fitch’s decision as bizarre and inept, especially given that the US economy “looks stronger than expected,” as he stated in a post on Twitter, now known as X.
Mohamed El-Erian, the chief economic adviser at the multinational financial services firm Allianz, described the Fitch announcement as strange. He wrote on the social media platform Threads, “This announcement is more likely to be disregarded than to have a lasting disruptive impact on the US economy and markets.” Fitch also stated that it anticipates the United States to enter a moderate recession later this year.
However, Nobel Prize-winning economist Paul Krugman stated that the biggest economic news of the past year was America’s remarkable success in reducing inflation without experiencing a recession. The chief US political economist at the Wall Street bank Goldman Sachs, Alec Phillips, stated, “The downgrade reflects governance and medium-term fiscal challenges, but not new fiscal information.”
It is unlikely that significant holders of Treasury securities would be compelled to sell as a result of the rating change, he added, so the move should have little direct impact on financial markets. Jason Furman, a former economic adviser to Barack Obama, was among those who doubted the timing of the Fitch announcement. He referred to it as completely absurd.