Fitch cuts U.S. credit rating to AA+; and the U.S. treasury calls it ‘arbitrary’. Fitch rating agency on Tuesday downgraded the U.S. government’s top credit rating, a move that drew an angry response from the White House and surprised investors, coming despite the resolution of the debt ceiling crisis two months ago.
Fitch credit rating importance
Fitch U.S. credit rating was downgraded to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.
Fitch rating agency had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to finalize the review in the third quarter of this year.
Why USA credit rating is falling?
With the downgrade, Fitch rating agency becomes the second major credit rating firm after Standard & Poor’s to strip the United States of its triple-A rating.
The dollar fell across a range of currencies, stock futures ticked down and Treasury futures rose after the announcement. But several investors and analysts said they expected the impact of the Fitch U.S. credit rating downgrade to be limited.
Fitch U.S. credit rating cut move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement that lifted the government’s $31.4 trillion borrowing limit, ending months of political brinkmanship.
“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.
U.S. Treasury Secretary Janet Yellen disagreed with Fitch’s downgrade, in a statement that called it “arbitrary and based on outdated data.”
The White House had a similar view, saying it “strongly disagrees with this decision”.
Will the Fitch U.S. credit rating dent its image?
Analysts said the Fitch U.S. credit rating shows the depth of harm caused to the U.S. by repeated rounds of contentious debate over the debt ceiling, which pushed the nation to the brink of default in May.
Fitch credit rating firm said repeated political standoffs and last minute resolutions over the debt limit have eroded confidence in fiscal management.
Many expressed surprise at the timing of USA credit rating downgrade, even though Fitch had flagged the possibility.
Opinions on credit rating firm downgrade
Still, investors saw limited long-term impact of lower USA credit rating.
“I don’t think you are going to see too many investors, especially those with a long-term investment strategy saying I should sell stocks because Fitch took us from AAA to AA+,” said Jason Ware, chief investment officer at Albion Financial Group.
Investors use top credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs.
Previous credit rating firm impact
In a previous debt ceiling crisis in 2011, Standard & Poor’s cut the 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 that downgrade by credit rating firm, U.S. stocks tumbled and the impact of the USA credit rating cut was felt across global stock markets, which were at the time already in the throes of the euro zone financial meltdown.
In May, Fitch credit rating had placed “AAA” rating of U.S. sovereign debt on watch for a possible downgrade, citing downside risks, including political brinkmanship and a growing debt burden.
A Moody’s Analytics report from May said a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.
“Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the U.S. economy and markets,” Mohamed El-Erian, President at Queens’ College, said in a LinkedIn post.
