Fitch Ratings Downgrades United States Credit Rating Amidst Rising Debt and Political Brinkmanship
On Tuesday, the Fitch Ratings agency downgraded the long-term credit rating of the United States, citing the nation’s high and growing debt burden and its history of political brinkmanship over borrowing authority. This downgrade marks the second in the country’s history, coming just two months after narrowly avoiding default on its debt.
The downgrade by Fitch affects the U.S. long-term rating, which has been lowered from AAA to AA+. The agency expressed concern over the nation’s fiscal management, particularly its recurring debt-limit standoffs and last-minute resolutions that have eroded confidence in the government’s ability to manage its finances. Fitch also noted that the U.S. lacks a medium-term fiscal framework, unlike most of its peers, and has a complex budgeting process.
One of the major factors in Fitch’s decision was the growing levels of U.S. debt in recent years, driven by new tax cuts and spending initiatives. The agency highlighted the limited progress made in addressing the rising costs of programs such as Social Security and Medicare, which are expected to escalate as the population ages.
Fitch is one of the three major credit ratings firms, along with Moody’s and S&P Global Ratings. The last time the United States was downgraded was in 2011 by S&P, during a debt-limit standoff.
The downgrade could potentially limit the number of investors able to purchase U.S. government debt, as some investors are bound by constraints on the quality of the debt they can buy. Those requiring a pristine credit rating across the three major agencies may have to seek alternative investments to fulfill their mandates. This could increase the cost of borrowing for the federal government, especially considering the prevailing high interest rates.
However, most analysts do not anticipate a severe impact given the size of the Treasury market and the ongoing demand for U.S. Treasury securities.
Despite this, the downgrade remains a stain on the nation’s fiscal management record. The Biden administration strongly criticized Fitch’s decision, arguing that it did not reflect the strength of the U.S. economy and labeling it as arbitrary. Treasury Secretary Janet L. Yellen emphasized that Treasury securities continue to be the world’s pre-eminent safe and liquid asset.
The Biden administration officials, speaking anonymously, revealed that they had been briefed by Fitch before the downgrade and had expressed their disagreements. Fitch representatives reportedly expressed concerns about U.S. governance, referencing the January 6, 2021 insurrection.
Coincidentally, the Fitch downgrade occurred on the same day that former President Donald J. Trump was indicted in connection with his efforts to overturn the 2020 election, which fueled the January 6 riot.
Senator Chuck Schumer of New York, the majority leader, put the blame on Republicans, accusing them of reckless brinkmanship and using the debt limit for political leverage. He called for an end to this practice.
The recent debt limit agreement reached in June includes federal spending cuts of $1.5 trillion over a decade. However, lawmakers and the White House avoided significant cuts to politically sensitive programs such as retirement initiatives. Despite the spending curbs, the national debt, standing at over $32 trillion, is expected to surpass $50 trillion by the end of the decade.
It is unlikely that Fitch’s downgrade will prompt lawmakers to make drastic changes to the country’s fiscal trajectory. Experts predict that instead, Congress will criticize Fitch without taking substantial actions to address the deficit, increase taxes, reduce military spending, or implement entitlement reform.
Overall, the downgrade serves as a reminder of the challenges the United States faces in managing its debt and the need for long-term fiscal solutions.