Fitch cuts US government’s AAA credit rating in surprise move
By Christopher Rugaber
Fitch Ratings has downgraded the US credit rating, citing an expected increase in government debt over the next three years and a “steady deterioration in standards of governance” over the past two decades.
The rating was cut one notch to AA+ from AAA, the highest possible rating. It’s only the second time in the nation’s history that its credit rating has been cut, the latest downgrade coming after Standard & Poors stripped the US of its AAA rating in 2011.
The US’s credit rating was downgraded by Fitch.Credit: Bloomberg
Fitch cited the worsening political polarisation around spending and tax policy as a key reason for the downgrade. It said US governance has declined relative to other highly rated countries and it noted “repeated debt limit standoffs and last-minute resolutions.”
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement.
US Treasury Secretary Janet Yellen criticised the move.
“I strongly disagree with Fitch Ratings’ decision. The change by Fitch Ratings announced today is arbitrary and based on outdated data,” Yellen said in a statement.
The US dollar moved lower against the Australian dollar and other major currencies after the announcement.
In 2011, Standard & Poors stripped the US of its prize AAA rating and also pointed to partisan divisions that made it difficult for the world’s biggest economy to control spending or raise taxes enough to reduce its debt. Its rating is still AA+, which is its second highest.
After the S&P downgrade, US stocks tumbled and the impact of the rating cut was felt across global stock markets, which were at the time already in the throes of a financial meltdown in the eurozone. Paradoxically, US Treasuries prices rose because of a flight to quality from equities.
In May, Fitch had placed its AAA rating of US sovereign debt on watch for a possible downgrade, citing downside risks including political brinkmanship and a growing debt burden.
“The change by Fitch Ratings announced today is arbitrary and based on outdated data,” US Treasury Secretary Janet Yellen said.Credit: AP
Reduced credit ratings could lead the US to pay higher interest rates on its notes, bills, and bonds.
LPL Financial chief global strategist Quincy Krosby said the move is a warning shot to the US.
“This is a warning. Economists say that if the US doesn’t get its fiscal house in order, its currency is going to weaken, but the currency doesn’t weaken. And what Fitch is essentially saying is, it’s going to happen and the dollar is going to become a casualty.”
“This was unexpected, kind of came from left field,” said Truist Advisory Services co-chief investment officer, Keith Lerner,
“As far as the market impact, it’s uncertain right now. The market is at a point where it’s somewhat vulnerable to bad news...”
Democrats in Congress seized on the downgrade to blame Republicans for holding up a US debt ceiling increase earlier this year.
“This is the result of Republicans’ manufactured default crisis. They’ve repeatedly put the full faith and credit of our nation on the line, and now, they are responsible for the second downgrade in our credit rating,” Democrats on the Ways and Means Committee said in a statement.
AP, Reuters, Bloomberg
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