[International Sharp Review] The downgrade of US credit is a triple warning rating issued to Washington | Fitch | US
The Democratic and Republican parties in the United States are fighting again! This is because the international rating agency Fitch Ratings downgraded the US credit rating on the 1st, lowering the default rating of long-term foreign currency issuers from AAA to AA+. As soon as the news came out, the two parties engaged in heated debates and accusations, causing endless uproar. The Democratic Party claimed that the credit downgrade was the result of Republicans artificially creating a default crisis, while the Republican Party attributed the reason to the Biden administration's inadequate handling of economic affairs.
The new round of "blame swapping" between the two parties precisely confirms an important reason for Fitch's downgrade of the US credit rating. The agency issued a statement stating that over the past 20 years, the United States has repeatedly experienced political deadlocks on the debt ceiling, often dragging it to the last minute to resolve, weakening people's confidence in the country's fiscal management capabilities. Some analysts believe that this is the first warning to Washington that political polarization leads to insufficient governance capacity.
In American politics, "fighting for the sake of fighting" has become a distinct label of the relationship between the two parties. Far away, let's just talk about the recent "US debt crisis". Although both parties reached a last-minute consensus to suspend the debt ceiling for two years, avoiding a default on US bonds. But in the months leading up to this, both parties engaged in a "tug of war" and played "cowardly games" to grab the biggest political chips, causing the market to be fearful. In May of this year, Fitch placed the US sovereign credit rating on a negative watch list. This official rating downgrade can be seen as further expressing disappointment and dissatisfaction with the continued decline in the governance capacity of the US government. The agency expects that the US government will not take any substantial fiscal consolidation measures before the November 2024 election.
Meanwhile, Fitch's statement pointed out that the US fiscal situation will continue to deteriorate over the next three years, with high and increasing government debt. This is regarded as the second warning to Washington - the "debt overhang" of the United States is alarming, and the prospect of debt expansion economy is worrying.
According to information on the website of the US Treasury Department, as of July 31st, the federal government's debt reached $32.6 trillion, equivalent to nearly $100000 in debt per American. It is reported that the size of US debt exceeded 32 trillion US dollars, nine years ahead of the forecast before the COVID-19 epidemic. Fitch predicts that by 2025, the proportion of US government debt to GDP will rise to 118.4%. By comparison, the median debt to GDP ratio of AAA rated countries by the agency is 39.3%, while the median debt to GDP ratio of AA rated countries is 44.7%.
From a historical perspective, this is not the first time that the US credit rating has been downgraded. In 2011, another Western rating agency, Standard&Poor's, stripped the United States of its AAA rating due to the prolonged debate between the two parties on government borrowing limits. But this time the situation is different. Comparing the debt size, it is not difficult to find that the size of the US federal government debt was about $15 trillion back then, but now it has doubled. An analysis suggests that the fundamental conditions for Fitch's decision to downgrade its rating are even worse than a decade ago. The snowball of US debt is getting bigger and bigger, and it is feared that it will collapse one day. The Keito Institute, an American think tank, has warned that the increasing size of federal government debt will curb private investment and increase the risk of sudden fiscal crises, becoming a "national security" issue for the United States.
The third warning signal concerns the credibility of the United States, which may accelerate the process of de dollarization. A study has pointed out that Fitch's downgrade of the US credit rating has caused significant volatility in most developed markets, and many countries are already evaluating the negative effects of this decision on the world. The South Korean government announced on the 2nd that it will strengthen market supervision to prevent financial market turbulence caused by the downgrade of US credit.
The reason why the US dollar has become an international currency is due to government credit. Once credit is eroded, people naturally have to make new choices. For a period of time, more and more countries, from Latin America to important global energy sources such as the Middle East and Africa, to Europe and the Asia Pacific, where the United States has dense allies, have already or plan to "de dollarize". Recently, Bolivia began using the renminbi in import and export transactions, becoming the latest South American country to frequently use the renminbi.
After Fitch Ratings downgraded the US credit rating, several US government officials responded strongly, expressing dissatisfaction and anger, claiming that this decision was "unrealistic.". But upon closer analysis, this decision is not surprising and precisely reflects reality. Instead of spending time on internal conflicts, Washington politicians should think carefully about how to solve America's economic problems and truly save face.
