Ratings agency Fitch on Tuesday downgraded the US government’s top credit rating to AA+ from AAA, citing an expected fiscal deterioration over the next three years as well as a high and growing general government debt burden.
The dollar ticked lower following the downgrade, which came two months after President Biden and the Republican-controlled House reached a debt ceiling agreement after months of political brinkmanship. The deal lifted the government’s $31.4 trillion debt ceiling.
“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.
Treasury Secretary Janet Yellen said she disagreed with Fitch’s downgrade, in a statement that called it “arbitrary and based on outdated data.”
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets.
“This was unexpected, kind of came from left field,” said Keith Lerner, Co-Chief Investment Officer, Truist Advisory Services, Atlanta. “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…”
The dollar moved lower against a basket of major currencies after the announcement. US stock index futures had yet to resume trading.
In a previous debt ceiling crisis in 2011, Standard & Poor’s cut the US top ‘AAA’ rating by one notch a few days after a debt ceiling deal, citing political polarization and insufficient steps to right the nation’s fiscal outlook. Its rating is still ‘AA-plus’ – 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 euro zone. 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.
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