Fitch Ratings Downgrades US Long-Term Rating Amid Rising Debt Burden and Political Dysfunction
August 3, 2023
Debt Ceiling Concerns and Rating Downgrade
Despite a deal being reached over the debt ceiling just over two months ago, the lingering political dysfunction in Washington and the continually growing debt burden persist as areas of concern. The United States’ long-term rating has been downgraded from AAA to AA+ by Fitch Ratings, mirroring a similar action by S&P Global Ratings in 2011 after another government standoff. In May, Fitch had put America’s sovereign status on negative watch, and even the bipartisan agreement to suspend the debt limit until January 2025 did little to ease its concerns. Credit ratings and their relevant agencies have proven crucial to investors.
Factors Influencing the Downgrade
The key drivers for this rating include recurring political standoffs over the debt limit and the ensuing last-minute resolutions which have resulted in diminished confidence in fiscal management. As stated by Fitch, “the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process”. Moreover, it expects the General Government debt-to-GDP ratio to increase, reaching 118.4% by 2025. Contributing factors such as various economic shocks, tax cuts, and new spending initiatives have led to successive increases in debt over the past decade.
Response and Repercussions of the Downgrade
Treasury Secretary Janet Yellen strongly disputed the downgrade, terming it as “arbitrary” and critiquing Fitch for relying on “outdated” data. She further stated that many metrics used by the ratings agency, including governance-related ones, have improved with the passage of bipartisan legislation to address the debt limit and invest in infrastructure. Following Fitch’s decision, stock futures saw a decline while yields experienced volatility, reflecting investor evaluations of the outlook for the $25T global Treasury market.
Averting Future Standoffs Over Debt Limit
Only a fortnight ago, President Biden formed a team to consider methods to avoid future conflicts over the country’s debt limit. A White House statement at that time affirmed the need to “explore all legal and policy options to prevent Congress from ever again holding hostage the full faith and credit of the United States”. The task force, comprising administration officials with no Republican representation, is spearheaded by White House Counsel Stuart Delery and National Economic Council Director Lael Brainard.