The Fitch downgrade of the US’s credit rating to ‘AA’ has caused a stir in financial markets and sparked a response from the Biden Administration. This is reminiscent of the reactions in 2013 when the UK was downgraded after the Great Financial Crisis.
It is noteworthy that the American downgrade has implications for the credit profile of US companies and the debt profile of government entities. In some cases, asset managers may need to seek exemptions from existing rules. Fitch’s downgrade aligns with the views of Standard & Poor’s, which downgraded Washington to ‘AA+’ following the 2008-09 banking crisis.
However, it is important to acknowledge the hypocrisy of credit rating agencies like S&P and Moody’s, who gave top ratings to sub-prime mortgage packages prior to their collapse, contributing to the financial crisis.
Coincidentally, the Fitch downgrade occurred on the same day as indictments against Donald Trump, who remains the frontrunner for the Republican nomination in 2024, despite his legal troubles. This is an unusual situation where a sitting president faces challenges from within his own party.
The root of the Fitch downgrade lies in the failure of successive presidents to control federal spending. Although the US narrowly avoided default with a recent debt limit agreement, the net debt to GDP ratio stands at 121% and is likely to rise due to Biden’s spending plans.
While investors may not be overly concerned due to the US’ status as the world’s reserve currency, there could still be temporary volatility and uncertainty if portfolio managers adjust valuations.
Given the budgetary costs for Ukraine’s defense and the additional capabilities of American forces, it is clear that US budgetary policy is a contentious issue. BAE Systems, a primary defense contractor in the UK, enjoys special status at the Pentagon, which is advantageous for the company.
The value of Cambridge-based chip designer Arm continues to soar, with an estimated IPO value of £55 billion. This highlights the mistake of selling the company to Softbank in 2016, and the frustration that it couldn’t be brought back to the UK.
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