Secret Service Police are present as climate activists stage a demonstration in Lafayette Park near the White House on July 4, 2023, demanding President Biden take action on climate change. They unfurl a 120-foot banner to emphasize their message. (Photo by Tasos Katopodis | Getty Images)
Fitch Ratings has opted to downgrade the United States’ long-term foreign currency issuer default rating from AAA to AA+. This decision, announced on Tuesday, is based on concerns over the expected deterioration of the nation’s fiscal situation over the next three years, a decline in governance standards, and an increasing general debt burden.
“Fitch’s confidence in fiscal management has been eroded by repeated political standoffs over the debt limit and last-minute resolutions,” stated the agency.
In response to the downgrade, U.S. stock futures experienced a decline, with Dow futures dropping approximately 100 points.
In May, Fitch had already placed the nation’s AAA rating on negative watch due to tensions surrounding the debt ceiling. At the time, Washington politicians were engaged in a disagreement over an agreement to ensure the federal government had adequate funds. President Joe Biden signed the debt ceiling bill on June 2, just days before the “X-date” on June 5.
The recent debt limit disputes are once again highlighted in Tuesday’s downgrade.
“Fitch believes that governance standards, particularly in relation to fiscal and debt matters, have steadily deteriorated over the past two decades, despite the bipartisan agreement in June to suspend the debt limit until January 2025,” emphasized the ratings agency.
Fitch also drew attention to the increasing general government deficit, projecting it to rise from 3.7% of gross domestic product in 2022 to 6.3% in 2023. The agency stated that the cuts to non-defense discretionary spending, as agreed upon in the Fiscal Responsibility Act, only provide a slight improvement to the medium-term fiscal outlook.
The agency warned of potential consequences such as tighter credit conditions, weakened business investment, and a slowdown in consumption that could lead to a “mild” recession in the fourth quarter of 2023 and the first quarter of the subsequent year.
The White House opposed Fitch’s downgrade, with press secretary Karine Jean-Pierre stating, “It is unfathomable to downgrade the United States at a time when President Biden has achieved the strongest economic recovery among major world economies.”
This is not the first time a rating agency has downgraded the United States. In 2011, Standard & Poor’s reduced the nation’s credit rating from AAA to AA+ after Washington managed to avert a default. Political risks were cited as a contributing factor in the decision-making process.
–Reporting by CNBC’s Christina Wilkie
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