Fitch Ratings Downgrades US Credit Rating, "Continued Decline in Governance Level" Downgrades US Credit Rating | Fitch

Due to concerns about the level of governance and fiscal situation in the United States, international rating agency Fitch Ratings decided on August 1st to downgrade the default rating of long-term foreign currency issuers in the United States from AAA to AA+.

According to US media, this is the second time in US history that the credit rating has been downgraded, which may have a widespread impact on domestic and foreign commercial and financial activities. At the same time, the Biden administration criticized Fitch's decision and shifted the blame to the Republican Party.

The level of governance continues to decline

According to reports, after Fitch downgraded the credit rating of the United States from AAA to AA+, its credit rating is now comparable to countries such as Austria and Finland, but not as good as Switzerland and Germany.

Fitch gave two reasons when announcing this decision.

On the one hand, over the past 20 years, the governance level of the United States in fiscal and debt issues has continued to decline, especially compared to countries rated AAA.

"This is reflected in the repeated debt ceiling stalemate, which dragged on until the very last moment to come up with a solution," Fitch said.

Not long ago, the United States almost fell into its first-ever debt default. The US government hit a debt ceiling of $31.4 trillion in January this year, and the Treasury immediately took unconventional measures to avoid debt defaults. But Finance Minister Yellen warned that the relevant measures are expected to persist until early June.

However, there has been no substantive dialogue between the Republican and Democratic parties since February, until Yellen warned again on May 1st that a debt default would occur as early as June 1st, and Biden only held his first meeting with party leaders in several months.

However, as political polarization in the United States deepens, both parties in Congress engage in extreme tugs of war on the debt ceiling issue, staging a familiar "cowardly game" together.

For a period of time, the uncertainty surrounding the US government's debt default has caused market concerns, and has also had a negative impact on the credibility and status of the United States. On May 24th, Fitch announced a downgrade of the outlook for the US sovereign credit rating to "negative", believing that the stalemate in debt ceiling negotiations at the time posed greater risks to the downgrade of the US sovereign credit rating.

About a week later, the two parties in Congress reached a preliminary agreement on the federal government's debt ceiling and budget at the end of May, and ultimately formed a related bill that was passed by Congress. This bill temporarily suspends the effectiveness of the debt ceiling until early 2025 and imposes restrictions on expenses for fiscal years 2024 and 2025.

According to relevant departments of the US Congress, since 2001, Congress has adjusted the debt ceiling more than 20 times. At present, the size of the US federal debt is approximately $31.46 trillion, accounting for over 120% of its gross domestic product, equivalent to $94000 in debt per American.

In this context, some comments suggest that Fitch's latest decision reflects the depth of harm caused to the United States by the stalemate between the two parties over the debt ceiling.

On the other hand, Fitch Ratings stated that due to tightening credit conditions, weakened commercial investment, and slowing consumption, it is expected that the US economy will enter a mild recession by the end of this year and early next year. At the beginning of this year, Federal Reserve economists also made similar predictions, but changed their attitude last month, stating that economic growth may slow down, but a recession may be avoided.

Fitch also predicts that the US fiscal situation will deteriorate over the next three years, with a high and continuously increasing government debt burden.

According to reports from US media, the January 2021 congressional turmoil that shocked the world was also one of the reasons why Fitch Ratings decided to downgrade the US credit rating, as it also reflected a decline in US governance.

For the second time in history

According to American media, this is the second time in US history that the credit rating has been downgraded. The last time was in 2011, when there was a debt ceiling stalemate between Republicans in Congress and the Obama administration, which lasted until the very end.

At that time, the uncertainty surrounding the US government's debt default triggered severe fluctuations in the global capital market, leading to S&P's downgrade of the US sovereign credit rating. The US Government Accountability Office estimated in a 2012 report that this stalemate increased the Treasury's borrowing costs by $1.3 billion that year.

However, in 2013, the two parties in the United States once again fell into a deadlock in debt ceiling negotiations due to cuts in social welfare and healthcare reform, leading to a government shutdown for half a month. Since 1976, the United States has experienced about 20 long or short government shutdowns due to debt ceiling issues.

With the debt ceiling issue repeatedly becoming a battleground of political struggle, S&P and Fitch have successively downgraded the US credit rating, and whether Moody's, another major rating agency, will make the same decision has attracted much attention. CNN reported that a US government official refused to make relevant speculations.

Widespread impact

The US media said that, since the ratings of major international institutions are regarded as one of the criteria for investors to judge risks, Fitch's latest decision may lead investors to sell US treasury bond bonds and the yield of US treasury bond fluctuate.

The fluctuation of treasury bond bond yield is regarded as one of the factors affecting the credit interest rate. From the mortgage rates paid by Americans to commercial transactions around the world, Fitch's latest decision may have a wide-ranging impact.

Over time, a lower credit rating may also lead to an increase in borrowing costs for the US government, with interest rates already at high levels.

After Fitch announced its latest decision, the three major US stock indexes closed with mixed gains and losses.

The Biden administration has been critical of Fitch's latest decision and has shifted the blame to Republicans.

"I strongly oppose Fitch Ratings' decision," Yellen said in a statement, stating that the decision is "arbitrary" and based on outdated data.

White House press secretary Karina Jean Pierre also expressed strong opposition and questioned Fitch's rating system.

"Obviously, the extremism of Republican officials - from advocating default, to undermining governance and democracy, and then seeking to extend tax incentives for the wealthy and businesses - poses a sustained threat to our economy."

Senate Majority Leader Chuck Schumer also criticized the Republican Party in the House of Representatives. He said in a statement that their "reckless marginalization policies and manipulation of defaults have had a negative impact on the country."

On the Republican side, House Speaker Kevin McCarthy did not immediately comment.

As the political struggle between the two parties in the United States continues, American media say that the escalating political polarization and Washington's repeated stalemate on spending and tax issues may ultimately cost American taxpayers.