The foreign currency issuer default rating of the United States was downgraded from AAA to AA+ by Fitch Ratings on Tuesday.
Although the new rating is still considered investment grade, the downgrade was due to anticipated fiscal decline within the next three years, a decrease in governance, and an increase in overall debt.
Fitch expressed concern over repeated political disputes over the debt limit and last-minute solutions which have eroded confidence in fiscal management. This decision highlights the potential consequences of political polarization and Washington standoffs on the U.S. taxpayers as a lower credit rating could lead to higher borrowing costs for the government.
This is only the second time in history that the nation’s credit rating has been lowered, with the first being in 2011 when Standard & Poor’s removed the U.S. from its AAA rating after a prolonged argument over the government’s borrowing limit.
In 2012, the Government Accountability Office estimated that the 2011 budget standoff had increased Treasury’s borrowing costs by $1.3 billion.
Despite the large size of the United States economy and the stability of the federal government, its borrowing costs have remained low. During times of economic turbulence, global investors often turn to U.S. Treasury securities, which results in a decrease in interest rates paid by the government.
In May, the AAA rating of the nation was put on negative watch by the agency due to the debt ceiling dispute. At the time, lawmakers in Washington were in disagreement over an agreement to prevent the federal government from running out of money. The debt ceiling bill was signed by President Joe Biden on June 2, just before the “X-date” on June 5.
The debt limit disagreement was mentioned again in the recent downgrade by Fitch.
Fitch also pointed out the increasing general government deficit, which is expected to increase to 6.3% of the gross domestic product in 2023 from 3.7% in 2022. Fitch stated that “cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook.”
According to a person familiar with the discussions between the administration and the rating agency, Fitch informed Biden administration officials that the Jan. 6, 2021 insurrection was a factor in its decision to downgrade due to the instability it indicated in the government. The person stated that Fitch produced a report last year showing that government stability declined from 2018 to 2021 but increased since Biden became president.
Fitch’s decision was also influenced by its expectation that the U.S. economy will experience a “mild recession” in the final three months of this year and early next year. While economists at the Federal Reserve made a similar prediction in the spring, they reversed it in July and stated that growth would slow down but that a recession would most likely be avoided.
The White House disagreed with Fitch’s downgrade, with press secretary Karine Jean-Pierre stating that “it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world.”
DXY Short (Sell)
Enter At: 101.946
T.P_1: 101.782
T.P_2: 101.591
T.P_3: 101.463
T.P_4: 101.318
T.P_5: 101.190
T.P_6: 101.045
S.L: 102.673
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