Must try harder
The U.S. has lost its top credit rating from Fitch Ratings, one of the three major credit rating agencies, due to its recent political gridlock over the debt ceiling and deteriorating fiscal situation. How much does this matter?
Fitch re-calculated the U.S.’s long-term foreign-currency issuer default rating (IDR) from AAA to AA+ early August 2023, reportedly saying it was because of a ‘steady deterioration in standards of governance‘ and a lack of confidence in fiscal management.
Downgrade
The downgrade comes despite the resolution of the U.S. debt ceiling crisis in June 2023, when Congress agreed to suspend the $31.4tn borrowing limit until January 2025. Fitch warned that the U.S. faces serious long-term fiscal challenges, such as rising debt levels, unfunded social security and Medicare obligations, and the real possibility of a recession.
Disagree
Janet Yellen, the U.S. Treasury Secretary and the White House strongly disagreed with Fitch’s decision, calling it ‘arbitrary’ and ‘bizarre‘. They stated that the U.S. economy is fundamentally strong and that Treasury securities remain the world’s safest and most liquid assets. They reportedly suggested that Fitch’s calculation model is flawed and outdated.
Downgrade rattles markets
The downgrade is unlikely to have a significant impact on the U.S.’s borrowing costs or reputation, as it still retains its triple ‘A’ rating from the other two major credit rating agencies, Standard & Poor’s and Moody’s.
However, it could increase market volatility and pressure the U.S. to address its fiscal imbalances. But according to Janet Yellen these do not exist and there is no problem…?