In an unprecedented financial maneuver, the credit rating of the United States has been revised from AAA to AA+ by the global credit evaluation firm Fitch. This decision, announced last Tuesday, is grounded in the growing national debt and what Fitch describes as a discernible "decay in governance," particularly highlighted in recent disagreements over the nation's debt ceiling. This marks a historic event, as the last downgrade by Standard & Poor's in 2011 sparked bipartisan fury.
The administration's response was immediate and vehement. White House spokesperson Karine Jean-Pierre contended that Fitch's decision was incongruent with reality. Moreover, Treasury Secretary Janet Yellen openly questioned the assessment, characterizing it as whimsical and relying on obsolete data. Yellen additionally underscored a decline in Fitch's analytical model from 2018 to 2020, which she suggests casts doubt on the timing of this decision.
Fitch, however, upheld its judgment, elucidating that the lowered rating was a consequence of apprehensions regarding the foreseeable fiscal worsening in the forthcoming three-year period and the burgeoning national debt. The deterioration of governance in comparison to other nations was also cited as a factor. Despite the downgrade, Fitch designated a stable outlook for the new rating.
Financial market experts displayed mixed reactions. Mickey Levy of Berenberg Capital Markets warned of the immediate aftermath, foreseeing increased bond yields and potential tremors in both the stock market and the dollar. Yet he also predicted that these ripples will not have a substantial lasting impact, given the markets' existing awareness of the escalating debt issue.
Oxford Economics' lead US analyst, John Canavan, aligned with this view, positing that the downgrade's effects would not persist in the long term, drawing parallels to the limited impact of S&P's downgrade ten years ago. He did, however, express concerns over potential short-term disturbances in Treasury auctions due to a diminished psychological backing for dollar-dominated debt.
The situation was foreshadowed in May when Fitch shifted the country's credit status to "rating watch negative" amid growing political divisiveness that obstructed resolutions on the debt limit. Despite lawmakers forging a bipartisan accord to forestall default, Fitch's negative watch persisted into June, highlighting an ongoing and consistent degradation in governance over the past twenty years, with a specific focus on fiscal and debt regulations.
One glaring obstacle in front of the U.S. government is the absence of a comprehensive medium-term fiscal strategy, coupled with minimal progress in managing the burgeoning costs of social security and Medicare in light of an aging population. The political turmoil surrounding the debt ceiling vote, particularly recent stratagems by hard-line Republicans, further muddies the water, generating risks of political unrest and fiscal unpredictability.
Though the downgrade may have immediate reverberations in the financial markets, the core strength of the U.S. economy and the inherent reliability of Treasury securities remain intact. However, it is imperative for government officials to address the concerns voiced by credit evaluators like Fitch and embark on a path to rekindle faith in the nation's financial stewardship and governance.
