Washington: Fitch Ratings has lowered the sovereign credit grade of the United States from AAA to AA+, citing concerns about “ballooning fiscal deficits and erosion of governance” that have led to repeated debt limit crises over the past two decades. This downgrade reflects the mounting debts at federal, state, and local levels, along with a worrisome decline in governance standards over the last twenty years, according to reports.
Several factors have contributed to the recent decline in the US government’s economic status, like the fact that the US government’s debt has been steadily increasing in recent years and has now reached its highest level since World War II. This has raised concerns about the government’s ability to meet its debt obligations in the coming future. Fitch has also expressed worry about the deterioration of governance standards in the US. Repeated debt limit standoffs and last-minute resolutions have created uncertainty about the government’s capacity to fulfil its financial commitments.
Moreover, Fitch also highlighted challenges facing the US economy, including rising inflation and the potential for a recession. These factors could further strain the government’s financial situation. While AA+ is still considered a strong credit rating, it represents a significant downgrade from AAA.
The implications of this economic situation include higher borrowing costs for the government, leading to increased interest payments on its debt and a higher federal budget deficit. The downgrade could also undermine confidence in the US economy, making it harder for businesses to secure capital. Additionally, it might contribute to a more volatile financial market, complicating business planning.
Fitch Ratings provides an overarching assessment of a nation’s economic health. Its ratings offer forward-looking credit opinions on investments and assess the likelihood of default. Investors, intermediaries, debt issuers, and corporations use Fitch ratings. These ratings serve as indicators of investment opportunities and growth potential within a country.
Various indicators, such as AAA, AA, BBB, and more, are employed to classify a nation’s economy. Fitch Ratings assigns long-term credit ratings along an alphabetical spectrum spanning from ‘AAA’ to ‘D’. Similar to other rating agencies like S&P, Fitch also incorporates intermediate +/− modifiers within each category situated between AA and CCC. These classifications encompass AA+, AA, AA−, A+, A, A−, BBB+, BBB, BBB−, and so forth.
Over time, a Fitch downgrade (lower credit rating) can lead to higher borrowing costs for the government. A lower rating can hinder investment and loans for significant projects. The rating process typically begins when an issuer or underwriter contacts Fitch’s Business and Relationship Management group to request a credit rating.
According to Biden administration officials, the governance issues cited by Fitch occurred during the tenure of former President Donald Trump, Joe Biden’s predecessor. A senior Biden administration official criticised Fitch’s decision as “bizarre and baseless,” asserting that US governance had improved during the Biden presidency. The official deemed the downgrade a result of the previous administration’s actions and the conduct of congressional Republicans. However, according to officials, Fitch maintained the AAA rating during those years.