Fitch Ratings Downgrades United States’ Credit Rating
Fitch Ratings has recently downgraded the long-term foreign currency issuer default rating of the United States from AAA to AA+. This decision by Fitch is based on concerns about the expected deterioration of the country’s fiscal situation over the next three years and the increasing burden of general debt.
In May, Fitch had placed the nation’s AAA rating on negative watch due to the debt ceiling dispute. Lawmakers in Washington had clashed over reaching an agreement to prevent the federal government from running out of money. President Joe Biden signed the debt ceiling bill on June 2, just days before the crucial “X-date” on June 5.
The recent debt limit feud was highlighted again in the downgrade. Fitch believes that there has been a consistent decline in governance standards, especially regarding fiscal and debt matters, over the past two decades. Despite the bipartisan agreement to suspend the debt limit until January 2025, Fitch asserts that the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.
Fitch also draws attention to the growing general government deficit, which is expected to rise to 6.3% of the gross domestic product in 2023, up from 3.7% in 2022. Although the Fiscal Responsibility Act’s agreed-upon cuts to non-defense discretionary spending provide some improvement to the medium-term fiscal outlook, it remains modest.
The agency further warns of potential economic consequences, including a possible “mild” recession in the fourth quarter of 2023 and the first quarter of the following year due to tightening credit conditions, weakening business investment, and a slowdown in consumption.
This is not the first time the U.S. credit rating has been downgraded. In 2011, Standard & Poor’s lowered the country’s rating from AAA to AA+ after Washington managed to avoid default. The agency had cited political risk as part of its reasoning for the downgrade.
