WhatsApp Logo Subscribe
For News Alert

News

Fitch downgrades US credit rating after debt limit standoffs

By AFP

August 2, 2023 09:51 AM


Representational image

Twitter Share Facebook Share WhatsApp Share

 

Fitch downgraded the United States' top-notch credit rating by a step on Tuesday, citing a growing federal debt burden and an "erosion of governance" that has manifested in debt limit standoffs.

The decision to downgrade the US from AAA to AA+ sparked a fiery rebuttal from the White House, with press secretary Karine Jean-Pierre saying the move "defies reality."

Treasury Secretary Janet Yellen said in a separate statement that she "strongly" disagreed with Fitch as well, calling the change "arbitrary and based on outdated data."

It is the first such downgrade by a major ratings company in more than a decade. A debt ceiling impasse in 2011 saw S&P lower Washington's AAA rating, drawing bipartisan outrage.

"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 peers, said Fitch Ratings on Tuesday.

It added that there was a stable outlook assigned.

Yellen said Fitch's quantitative ratings model declined between 2018 and 2020, but the agency was only announcing its change now despite progress seen in indicators.

She argued that US "Treasury securities remain the world's preeminent safe and liquid asset, and that the American economy is fundamentally strong."

While the lifting of the US debt ceiling -- a limit on government borrowing to pay for bills already incurred -- was often routine, it has for several years become a contentious partisan issue.

- Little lasting impact? -

There is a "clear short-run implication" of the downgrade involving higher bond yields and a potential sell-off in the stock market and the dollar, said Mickey Levy of Berenberg Capital Markets.

But he does not expect long-run ramifications even if it could lead some investors to reduce their Treasury exposure in the near term.

Levy noted widespread awareness of the rising debt situation.

John Canavan, lead US analyst at Oxford Economics, does not expect the Fitch move to have a "lasting market impact."

"One key reason for that is that the S&P downgrade more than a decade ago already broke the dam on this front," he told AFP, noting that there was little lasting effect from that decision.

But "psychological support for dollar-denominated debt" could take a hit in the short-term, interfering with Treasury auctions at a time when it needs to ramp up the size of issuance, he said.

- 'Steady deterioration' -

In May, Fitch had placed the country's credit on "rating watch negative," reflecting increased political partisanship that hampered a resolution to raise or suspend the debt limit ahead of a looming deadline.

While lawmakers reached a bipartisan agreement to avert a catastrophic default, Fitch in June kept the US on negative watch.

"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," the agency said Tuesday.

"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," Fitch added.

It also said the US government "lacks a medium-term fiscal framework" and has seen only "limited progress" tackling challenges related to rising social security and Medicare costs as the population ages.

This year, hard-right Republicans dominating their party's narrow majority in the House of Representatives decided to use the debt limit vote as leverage for forcing President Joe Biden into accepting cuts to many Democratic spending priorities.

This triggered a test of political strength that threatened to end in chaos before the two sides reached an agreement.


AFP


Most Read

  1. Violent protests erupt at Lahore's Punjab Group of Colleges over girl's rape Violent protests erupt at Lahore's Punjab Group of Colleges over girl's rape
  2. Scores of LCWU students protest harassment by clerk Scores of LCWU students protest harassment by clerk
  3. Bangladesh JI chief supports Hasina’s trial for crimes against humanity Bangladesh JI chief supports Hasina’s trial for crimes against humanity
  4. Ramsha Khan and Ahad Raza Mir’s romantic strolls & shopping spree in London Ramsha Khan and Ahad Raza Mir’s romantic strolls & shopping spree in London
  5. Terrorists massacre 20 Pashtun workers at Duki coalmines in Balochistan Terrorists massacre 20 Pashtun workers at Duki coalmines in Balochistan
  6. Mehwish Hayat and Honey Singh tease fans with new song collaboration Mehwish Hayat and Honey Singh tease fans with new song collaboration