02-Aug-2023
2 mins read
Fitch Rating Agency has downgraded the US’s credit rating from AAA to AA+ due to expected fiscal deterioration and a high government debt burden. This downgrade implies that Fitch believes the creditworthiness of the US has slightly reduced.
The downgrade from AAA to AA indicates that Fitch considers the risk of default on US debt obligations to be slightly higher than before. These ratings are used as a benchmark to judge how risky it is to lend money to a particular government.
Credit rating agencies are organisations which independently asses Countries’ and Companies credit worthiness by considering factors such as economic performance, fiscal policies, and the ability to pay off debts. A downgrade in credit rating could impact the cost of borrowing, investor confidence, and overall economic conditions.
The US’s credit rating has been downgraded only twice in its history. The first time was in 2011 when Standard and Poor’s removed its prized AAA rating. This downgrade happened due to a prolonged dispute over the government’s borrowing limit.
How US officials react
US Treasury Secretary Janet Yellen issued a statement declaring the downgrade as “arbitrary and based on outdated data”, a Reuters report said.” This is a bizarre and baseless decision for Fitch to make now. It simply defies common sense to take this downgrade as a result of what was really a mess caused by the last administration and reckless actions by congressional Republicans,” Reuters reported a senior Biden administration saying so.
Apart from Yellen, other experts in the field of economics also found the decision unexpected. Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, was also puzzled by the timing and various aspects of the announcement.
Impact on Stock Market
It seems the US market overlooked the decision, while the Indian markets experienced a decline of almost one per cent during intra-day trading on Wednesday (August 2). At the same time, other Asian markets also saw a drop of nearly two per cent
Fitch’s Explanation Behind This Move
Fitch believes that governance standards, especially concerning fiscal and debt matters, have declined steadily over the past 20 years. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. The government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.
Various other factors, comprising tax cuts, and new spending initiatives, economic shocks have led to increasing debt levels over the last decade. Moreover, little progress has been made in addressing the challenges posed by an ageing population, such as rising social security and Medicare costs.