US Loses Triple A Rating from Fitch Following Borrowing Stand-off

Fitch Ratings has downgraded the US debt rating from triple A to double A plus, citing deteriorating fiscal conditions and governance. This downgrade comes after two months of political brinkmanship that brought the world’s largest economy close to a sovereign default.

The rating agency stated that the downgrade is due to the “expected fiscal deterioration over the next three years” and a “high and growing general government debt burden”. Fitch also highlighted an “erosion of governance” over the past two decades, leading to repeated debt limit stand-offs and last-minute resolutions.

In June, Washington narrowly avoided a projected default after reaching a last-minute deal to raise the federal borrowing limit. Fitch had previously warned of a possible downgrade due to increased political partisanship hindering resolution.

Fitch is one of three major rating agencies whose opinions are closely monitored by market participants and economists worldwide. Moody’s still maintains a triple A rating for the US, while S&P downgraded its rating to double A plus in 2011 following a previous debt ceiling showdown.

The news had minimal impact on US Treasury bond markets and the dollar index, which measures the US currency against a basket of other currencies. The US stock market had closed prior to Fitch’s announcement.

In response to the downgrade, US Treasury Secretary Janet Yellen expressed disagreement, stating that it is arbitrary and based on outdated data. Yellen pointed out that Fitch’s ratings model declined between 2018 and 2020, despite progress in indicators used for their decision-making.

Fitch also expressed concern about the growing US debt burden. The agency predicts that the general government deficit will increase to 6.3% of GDP in 2023, up from 3.7% in 2022, due to weaker federal revenues, new spending initiatives, and a higher interest burden.

A lower credit rating typically leads to higher borrowing costs in debt markets. However, it remains uncertain whether this will be the case here, as the removal of the triple A rating by S&P had limited long-term effects on markets.

“The US credit rating is unique, and there is no general methodology for rating the world’s premier safe haven asset,” explained Edward Al-Hussainy, a senior analyst at Columbia Threadneedle. He added that Fitch’s action is meant to signal concerns about the debt ceiling process and the current fiscal trajectory, reflecting views on US politics rather than policy.