Explained: Why Fitch has downgraded US credit rating to AA+

WASHINGTON: Fitch Ratings has downgraded the credit rating of the United States government, attributing it to mounting debts at the federal, state, and local levels and a concerning decline in governance standards over the last two decades.

The credit rating was lowered on Tuesday by one notch, from AAA (the highest possible rating) to AA+, which still falls within the investment grade category.
Here are main reasons for Fitch’s downgrade of US rating

Rising debt: The US government’s debt has been growing steadily in recent years, and is now at its highest level since World War II. This has raised concerns about the government’s ability to repay its debts in the future.
Decline in governance standards: Fitch has also expressed concerns about the decline in governance standards in the US. This is evidenced by repeated debt limit standoffs and last-minute resolutions, which have led to uncertainty about the government’s ability to meet its financial obligations.
Potential for a recession: Fitch also noted that the US economy is facing headwinds, such as rising inflation and a potential recession. This could further strain the government’s finances.
The downgrade to AA+ is still considered to be a very strong credit rating, but it is a significant downgrade from AAA.
Implications
This could have a number of implications for the US economy, including:
Higher borrowing costs: The government will likely have to pay higher interest rates on its debt, which could increase the federal budget deficit.
Reduced confidence: The downgrade could reduce confidence in the US economy, which could make it more difficult for businesses to raise capital.
Increased volatility: The downgrade could lead to increased volatility in financial markets, which could make it more difficult for businesses to plan for the future.
This marks only the second time in the nation’s history that its credit rating has been downgraded. The first instance occurred in 2011 when Standard & Poor’s removed the coveted AAA rating due to a prolonged struggle over the government’s borrowing limit. The 2011 budget standoff alone was estimated to have raised Treasury’s borrowing costs by $1.3 billion that year, according to a Government Accountability Office report from 2012.
Despite the downgrade, the US economy’s substantial size and the historically stable nature of the federal government have helped keep borrowing costs relatively low. Global investors tend to seek refuge in US Treasury securities during economic turmoil, which further reduces the interest rate paid by the US government.
Fitch had previously issued a warning on May 24 that it might remove the government’s AAA rating as Congress struggled once again to raise the borrowing limit. However, a deal was eventually reached about a week later, suspending the limit and reducing the government deficit by approximately $1.5 trillion over the next ten years.
The Biden administration officials responded strongly to Fitch’s move, with treasury secretary Janet Yellen criticizing it as “arbitrary” and “based on outdated data.” Yellen argued that the US economy had rebounded rapidly from the pandemic recession, boasting low unemployment rates and solid economic expansion during the April-June quarter.
In conversations between the administration and the rating agency, Fitch reportedly disclosed that the January 6, 2021 insurrection at the Capitol was also a factor in their decision to downgrade. The event indicated a level of instability in the government. Nevertheless, Fitch’s report showed an improvement in government stability since Biden assumed the presidency, contrasting the decline noted between 2018 and 2021.
Biden officials protest ‘bizarre’ Fitch downgrade, cite Trump-era woes
According to Biden administration officials, the governance issues mentioned by Fitch occurred during the tenure of former President Donald Trump, Joe Biden’s predecessor. However, the credit rating agency maintained the AAA rating during those years, as per the officials’ statements.
“This is a bizarre and baseless decision for Fitch to make now,” a senior Biden administration said, adding that US governance, by Fitch’s measures, had improved during the Biden presidency.
“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,” the official said.
(With inputs from agencies)