Credit rating downgrade reflects the burden of US governance failure (global hotspot) | economy | US

The "treasury bond Clock" located in Manhattan, New York, is a large counter that updates the total public debt of the United States in real time and displays the amount that each American family has to bear. The picture shows people passing the "treasury bond Bell" on May 29.

Photo by Xinhua News Agency reporter Liu Yanan

Recently, international rating agency Fitch downgraded the default rating of long-term foreign currency issuers in the United States from the highest level of AAA to AA+.

Long term foreign currency issuer default rating, commonly known as credit rating, is a rating that evaluates the default risk of a country or company in foreign currency borrowing. International observers believe that the rating downgrade indicates that the US debt growth is unsustainable, and the US government's governance and financial management capabilities are questioned.

High debt raises doubts about US credit

Fitch Ratings recently issued a statement stating that the downgrade of the US credit rating is mainly due to the high and continuously increasing debt burden of the US government, and the fiscal situation is expected to continue to deteriorate over the next three years. Over the past 20 years, the United States has repeatedly experienced political deadlocks on its debt ceiling, often dragging on solutions until the very last moment, weakening people's confidence in its fiscal management capabilities.

This is the first time that Fitch Ratings has downgraded its US credit rating since its release in 1994, and also the second time in US credit rating history that it has been downgraded. In 2011, the Democratic and Republican parties in the United States were deadlocked in debt ceiling negotiations and only reached an agreement to raise the debt ceiling in the final moments before the default date. Afterwards, the international rating agency Standard&Poor's downgraded the US credit rating from AAA to AA+. As of now, among the three major international rating agencies, only Moody's still maintains an AAA rating for the United States.

Fitch's decision to downgrade the US credit rating has caused dissatisfaction from the US side. The Associated Press reported that US Treasury Secretary Yellen stated that Fitch's move was "arbitrary" and "based on outdated data.". Yellen pointed out that the US economy has recovered rapidly from the recession of the COVID-19 epidemic, the unemployment rate is close to the low point in half a century, and the annual economic growth rate reached 2.4% in the second quarter of this year. "The fundamentals of the US economy are strong. The US treasury bond is still the safest and most liquid asset in the world".

"The current economic data in the United States has improved, with economic growth exceeding expectations in the second quarter of this year and a decrease in unemployment and inflation rates. However, Fitch's decision to downgrade the US credit rating is not only based on current economic data, but also on the overall state of the US economy over a period of time, making judgments about its future trends. Therefore, Fitch's decision is not surprising," said Wei Zongyou, a professor at the Center for American Studies at Fudan University, in an interview with our reporter.

Economist Felipe Silva from the University of Missouri in the United States also believes that Fitch's downgrade of the US credit rating is reasonable. "Repeated increases in the US debt ceiling will make investors worried about the US bonds they hold, and the fear of a US debt default will also intensify, which will seriously undermine the stability and credibility of the US economy."

In recent years, the debt ceiling crisis in the United States has repeatedly occurred, and the Democratic and Republican parties continue to play a fierce game on the debt ceiling issue.

In May of this year, Fitch placed the default rating of long-term foreign currency issuers in the United States on a negative watch list. At that time, negotiations between the Democratic and Republican parties on raising the federal government's debt ceiling were deadlocked. Fitch Ratings has warned that both parties in the US Congress have adopted a marginal policy on the debt ceiling issue, while the government has failed to effectively address medium-term fiscal challenges, leading to an increase in budget deficits and an increasing debt burden, all of which indicate a risk of declining US credit.

In early June, US President Biden signed a bill on the federal government's debt ceiling and budget, temporarily avoiding a debt default for the US government. The bill temporarily suspends the effectiveness of the debt ceiling until early 2025 and imposes restrictions on expenses for fiscal years 2024 and 2025.

Intensified Party Struggle and Problems in US Political and Economic Governance

"Fitch's downgrade of the US credit rating is actually a vote of no confidence in the US's long-term fiscal governance ability in the past 20 years and in the future." Zhang Molan, vice minister and researcher of the US Europe Research Department of the China Center for International Economic Exchanges, analyzed to our reporter that at present, most of the US treasury bond is held by domestic investors, and the Federal Reserve is the largest holder of US debt, so from the perspective of trigger risk, the possibility of US debt default is unlikely. The reason why Fitch downgraded the US credit rating is not only to evaluate the risk itself, but also to judge the US fiscal governance capacity. "In the past 20 years, the size of the US fiscal deficit has been increasing, the debt ceiling has been continuously increasing, and the US fiscal governance capacity has declined."

According to information on the website of the US Treasury Department, the federal government's debt reached $32.6 trillion as of July 31st. It is reported that the US debt scale exceeded US $32 trillion nine years earlier than the prediction before the COVID-19 epidemic.

Fitch predicts that the proportion of US government debt to GDP will rise to 118.4% by 2025, far higher than the pre pandemic level of around 100%. The agency predicts that the proportion of US government debt to GDP will further increase, which will exacerbate the vulnerability of the US fiscal situation to future economic shocks.

Wei Zongyou believes that Fitch's downgrade of the U.S. credit rating reflects two concerns: "First, the U.S. debt has repeatedly hit a record high in recent years, causing concern about the financial sustainability of the United States and whether the U.S. federal government is able to pay interest; second, the Democratic and Republican parties continue to wrangle over the issue of raising the U.S. debt ceiling, taking this as a counterweight to their opponents, making the outside world worry that once the two parties fail to reach an agreement, a new round of federal government shutdown or even serious debt default may be triggered, which will have a negative impact on the U.S. economy and the global economy. The financial" spending more money than money "and political bipartisan infighting indicate that there are problems in both U.S. economic and political governance."

The Wall Street Journal recently published an editorial stating that Fitch's downgrade of the US credit rating highlights the lack of seriousness in US economic decision-making. The article states that the reason why the United States did not have its credit rating downgraded earlier and more frequently is because the US dollar remains the world's reserve currency, but this "arrogant privilege" is not innate. If the market perceives a broader decline in US government governance or ability to fulfill financial obligations, this privilege may disappear instantly.

"The root of the US debt problem lies in the hegemony of the US dollar. The status of the US dollar as the world's reserve currency has encouraged the US to issue excessive currency without restraint, leading to the explosive expansion of the US treasury bond. The US Congress set the debt ceiling precisely to restrict the issuance of debt. But at present, the two parties in the US have no intention to cut fiscal spending in order to seek political votes and partisan and private interests. It can be predicted that the US federal government debt and the US fiscal deficit will further expand in the future. At the same time, as the burden of repaying the principal and interest of the US intensifies, it is difficult for the US economic growth to bring fiscal revenue to cover the rise of its fiscal spending and debt costs. The US debt problem has actually become an unsolvable problem," Zhang said.

Michael Peterson, CEO of the Peter Peterson Foundation in the United States, pointed out that the continuous accumulation of federal government debt is the result of multiple "irresponsible" fiscal issues by both the Democratic and Republican parties. In the past few decades, US government officials have repeatedly chosen to reduce taxes or push for government spending plans rather than considering the future of the United States.

Confidence gradually diminishes, and the financial status of the United States weakens

According to reports, the day after Fitch downgraded the US credit rating, the US stock market experienced its largest decline in six months. In addition, European and Asia Pacific stock markets have also experienced a sharp decline across the board, leading to an increase in risk aversion in the global market.

According to CNN, the downgrade of the US credit rating may lead investors to sell US treasury bond bonds and have a potential impact on the housing loan interest rate of Americans.

Fox News quoted Kevin Ollie, a well-known investor and the host of the US reality show "Creative Winner", as saying that the US credit rating was downgraded, indicating that people are losing confidence in the US dollar and US treasury bond bonds. This weakening of confidence may lead to the United States needing to pay higher interest rates to other governments to persuade them to finance its deficit, which is not good news for the United States.

"A direct impact of Fitch's downgrade of the US credit rating is the increase in borrowing costs for the US federal government, which will further increase the US fiscal burden and create a vicious cycle. In addition, international investors will also be concerned about the health of the US economy and stock market, and the global stock market will have a chain reaction," said Wei Zongyou.

Fitch predicts that the US economy may experience a "mild" recession in the fourth quarter of this year and the first quarter of next year due to factors such as tightening credit conditions, weak commercial investment, and slowing consumption.

Experts say that in the medium to long term, Fitch's downgrade of the US credit rating reflects increased downward pressure on the US economy, deteriorating fiscal conditions, increased debt burden, and a decline in the government's long-term governance capacity. This may to some extent weaken the US financial status and the reserve currency status of the US dollar.

Wang Jinbin, Vice Dean of the School of Economics at Renmin University of China, analyzed that the downgrade of the US credit rating means an increase in funding costs and also an increase in risks. This will undermine the risk appetite of investors in international financial markets and also reduce the attractiveness of the US dollar and its assets. International investors will reconsider asset allocation on a global scale.

"In the past, in order to solve the U.S. debt crisis, the Federal Reserve launched an unlimited quantitative easing policy and purchased U.S. treasury bond bonds in the way of" helicopter dropping money ", which led to a backlog of inflation in the United States. Next, can the United States still bear the pressure of high inflation? At the same time, in the context of global economic rebalancing, especially after the Russia-Ukraine conflict, the United States used the dollar as a tool to sanction other countries, accelerating the de dollarization of major economies in the world. Who will pay for the future U.S. treasury bond? This is the most urgent problem facing the United States." Zhang Molan said.

According to analysts cited by the US news website "Central Square", Fitch's move to downgrade the US credit rating has sounded an "alarm bell". As Fitch pointed out, the US treasury bond continues to soar, the fiscal deficit remains high, and the share of income consumed by interest costs is growing. The US is about to face many major financial challenges. Over time, trust funds for healthcare, social security, and highways in the United States will face bankruptcy in the next 10 years.