Fitch DownGrades US, Sends Markets Lower

In a significant move, Fitch Ratings demoted the United States’ long-term foreign currency issuer default rating from AAA to AA+ on Tuesday, triggering a dip in global stock markets the following day. The firm had previously placed the country’s rating under negative watch in May, primarily due to the debt ceiling concern.

Richard Francis, Fitch’s co-head of the Americas sovereign ratings, pointed out that there has been a consistent decline in the US’s key metrics over several years. “General government debt was below 60% in 2007, and it has now reached 113%, indicating a clear decline,” he stated on CNBC’s “Squawk on the Street.” Francis also projected rising fiscal deficits over the next three years, which will lead to further debt accumulation.

Francis attributed the downgrade to the continuous political impasse over the debt ceiling among Republicans and Democrats, further exacerbated by the January 6, 2021 insurrection. This deadlock has obstructed the US government from implementing substantive solutions to escalating fiscal issues, notably the entitlement programs such as Social Security and Medicare.

In order for the US to regain the top rating, Francis said Fitch would look for a comprehensive, long-term fiscal solution addressing entitlement programs, consideration of the revenue and spending aspects of such programs, a reduction in the deficit, and the resolution of the debt ceiling issue through suspension or elimination.

“Given the towering level of debt, the projected rise in deficits, and the degradation in governance and unwillingness to genuinely tackle these issues, we don’t think it aligns with a AAA rating anymore,” said Francis.

Numerous critiques of the downgrade emerged, from renowned economists to the White House, asserting the resilience of the US economy. Responding to these, Francis emphasized that despite the importance of the economy and its potential to influence the US’s overall fiscal condition, it’s not enough to address the governance issues.

“The notion that merely avoiding a recession should prevent a downgrade does not align with our perspective. We’re assessing a broader image of the US’s creditworthiness and our anticipations for the coming years,” he concluded.