Finance Minister Yellen: Too arbitrary! Rating agencies have responded by lowering the debt rating for the second time in US history | US | Rating
On August 1st local time, international rating agency Fitch Ratings downgraded the default rating of long-term foreign currency issuers in the United States from AAA to AA+, marking the second credit rating downgrade in US history. The White House and several government officials expressed dissatisfaction with this. Fitch responded to this on the 2nd.
On August 1st, Fitch Ratings stated in a statement that over the past 20 years, the United States has repeatedly experienced a political stalemate on the debt ceiling, which has been delayed until the very last moment, reflecting a "weakening of governance" - that is, a "stable deterioration" of US governance standards on fiscal and debt issues, weakening external confidence in its fiscal management capabilities. Fitch estimates that the total deficit of the US government will rise to 6.3% of GDP this year, compared to 3.7% last year. The ratio of general government debt to GDP will fall to 112.9% this year from the peak during the COVID-19 epidemic, but will rise to 118.4% by 2025. This ratio is much higher than the median level of Fitch's AAA and AA ratings.
Just minutes after Fitch Ratings announced its rating, US Treasury Secretary Yellen issued a statement refuting it, calling it "arbitrary.". Several government officials have also expressed opposition to Fitch's measures, emphasizing that Democratic President Biden should not be blamed for his Republican predecessor Trump. Republicans argue that the downgrade should be attributed to Bidennomics. According to US media reports, the US government was unable to persuade Fitch to abandon its rating downgrade. The other party insisted that a key factor in this decision was the riots caused by Trump supporters storming the Capitol in early 2021, as it reflected the instability of the US government. Bloomberg also speculates that Fitch's move may once again spark a struggle between the two parties over fiscal issues. There is currently a serious disagreement between the two parties regarding the government budget for the fiscal year 2024 starting from October 1st, which may lead to the federal government shutting down.
Fitch's response to US dissatisfaction: sufficient reasons for credit rating downgrade
In response to the US side's dissatisfaction, Richard Francis, senior director of Fitch Sovereign Ratings, responded on the 2nd that the US debt accounted for 113% of GDP, and this proportion has been rising. In recent years, when the Republican Party was in power, it continuously cut taxes, while when the Democratic Party was in power, it significantly expanded spending. The vacillating fiscal policy led to a more serious debt problem in the United States. Meanwhile, the high interest rate policy of the Federal Reserve's continued interest rate hikes has made it increasingly difficult for the US Treasury to sustain itself.
Over the past 20 years, the United States has repeatedly experienced political deadlocks on its debt ceiling, which have been resolved until the very last moment, reflecting a "deterioration in governance", that is, a "stable deterioration" of US governance standards on fiscal and debt issues, weakening external confidence in its fiscal management capabilities.
Francis also pointed out that the Capitol Hill riots in early 2021 were a clear example of the deterioration of governance by the US government, reflecting its instability. He also stated that the increasing political polarization in the United States and the intensifying struggle between the Democratic and Republican parties are also one of the reasons for Fitch's downgrade.
Francis emphasized that Fitch had already held multiple meetings with the US Treasury Department before the actual downgrade, during which it had communicated with US officials on relevant issues.
US credit rating downgraded, US stocks closed lower overall
On the 2nd local time, the three major US stock indexes closed lower overall due to Fitch Ratings downgrading the US credit rating. Among them, the Dow Jones Industrial Average fell 348.16 points to close at 35282.52 points, a decrease of 0.98%; The S&P 500 index fell 63.34 points to close at 4513.39, a decrease of 1.38%; The Nasdaq Composite Index fell 310.47 to close at 13973.45, a decrease of 2.17%.
