Economist suggests Fitch debt downgrade is here to stay due to U.S. political polarization

Growing political instability means the U.S. will not regain its AAA rating with Fitch in the foreseeable future, according to Elliot Hentov, head of macro policy research at State Street Global Advisors.

Global stock markets fell sharply on Wednesday after ratings agency Fitch downgraded the United States’ long-term foreign currency issuer default rating from AAA to AA+. Fitch cited “expected fiscal deterioration over the next three years” and an erosion of governance due to “repeated debt-limit political standoffs and last-minute resolutions.”

However, prominent bank executives and economists have dismissed the decision, claiming it is of little consequence. Hentov agrees, stating that he does not consider it a significant development.

“The ratings are essentially a slow-moving indicator,” Hentov stated during an interview with CNBC’s “Squawk Box Europe” on Thursday.

“It doesn’t require a grand sovereign or analytical genius to realize that the U.S.’s fiscal profile is much worse now, the governance of public debt is deteriorating, and it’s not comparable to any other AAA-rated countries.”

Hentov was part of the Standard & Poor’s team that famously downgraded the U.S. government’s credit rating in 2011 due to political polarization surrounding the debt ceiling issue.

This year, another standoff between the White House and opposition Republicans pushed the U.S. economy to the brink of default. Only a last-minute deal between President Joe Biden and House Speaker Kevin McCarthy prevented a default.

When asked if the U.S. is likely to regain its “risk-free” AAA rating from Fitch in the near future, Hentov responded with a firm “no.”

“That’s the straightforward answer, unless there is a significant improvement in U.S. politics and stability,” Hentov commented.

Jim Reid, head of global economics and thematic research at Deutsche Bank, pointed out that the political climate in 2011, when S&P downgraded the U.S., was vastly different.

“The debt ceiling fight and downgrade occurred simultaneously. Additionally, S&P was the first agency to downgrade the U.S. from AAA, leading to a more profound initial shock compared to a second downgrade 12 years later,” Reid explained.

Reid also highlighted that the Federal Reserve had been reducing interest rates and committing to keeping rates exceptionally low until at least mid-2023 during its August policy meeting.