Fitch Ratings has downgraded United States' long-term foreign-currency issuer default rating to AA+ from AAA. In its report, the agency has cited erosion of governance, high debt burden and possibility of recession as some of the reasons behind the decision.
The ratings agency noted, “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
Fitch’s decision to downgrade the rating was criticised by US Treasury Secretary Janet Yellen. According to a Financial Times report, she said that the decision was aribitrary and based on old data. “Fitch’s quantitative ratings model declined markedly between 2018 and 2020, and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision,” Yellen said.
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While AA+ rating still falls in investment grade category, the downgrading from the highest possible rating is a significant step. According to the ratings agency, the country is expected to see a mild recession towards the end of 2023. Tighter credit conditions, weak investments and fall in consumption are some of the reasons cited by the ratings agency in its report.
Also Read | What Is Credit Rating?
Pointing to standoffs over debt limit, the agency said that the country’s governance standards have deteriorated in the last 20 years. It also said that the country has a complex budgeting process compared to its peers.
Also Read | What Is US Debt Ceiling Crisis?
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For the unversed, the United States government had a tense standoff over the debt limit earlier in May this year with the opposition-controlled Congress. While the US President Joe Biden-led administration wanted to increase the debt limit over the $31 trillion mark without any negotiations, the Republican party had asked for several fiscal assurances from the government. After rounds of negotiations, both the sides were able to reach a deal.
However, just months after the controversy ended, the country is expected to see another showdown soon over government’s budget. According to several reports, the Republican-led Congress is expected to not pass the funding bill which is required for government’s functioning. Some Republicans want to introduce further spending cuts to government’s budget which the Biden Administration have ruled out. Another standoff with President Biden’s administration is expected in September when the Congress resumes.
