The US credit rating has been downgraded again! Three major reasons expose drawbacks, International Bureau of Knowledge: Fitch Ratings after 12 years | Rating | United States

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

Currently, among the three major rating agencies, only Moody's maintains an AAA rating for the United States. In August 2011, S&P announced a downgrade of the US sovereign credit rating from the highest AAA to AA+, and set the rating outlook to negative.

Fitch's latest decision directly points to the three major drawbacks of the US government: a worrying fiscal situation, a lack of stable debt crisis resolution mechanisms, and a failure of US political leadership.

American financial industry insiders admit, "This incident undoubtedly left a crack in our armor. It is a blow to the reputation and status of the United States."

What impact will this latest change have on the United States?

The credit rating has been downgraded, and the two parties are throwing blame at each other

In a statement, Fitch Ratings pointed out that the United States has repeatedly experienced political deadlocks on its debt ceiling, often delaying solutions until the very last moment, weakening people's confidence in its fiscal management capabilities.

US government officials strongly oppose this, which means that the US no longer has the "highest credit quality" and "extremely strong ability" to fulfill financial obligations. US Treasury Secretary Yellen criticized the decision as "baseless," stating that the US economy is fundamentally strong and questioning the timing of the agency's actions. White House press secretary Caroline Jean Pierre also called this decision "unrealistic.".

In fact, Fitch's downgrade of the US credit rating is not unfounded. According to Fitch's statement and response, there are at least three main reasons behind this.

Firstly, the US fiscal situation is not optimistic.

Considering tightening credit conditions, weakening commercial investment, and slowing consumption, Fitch predicts that the US economy will enter a mild recession in the fourth quarter of 2023 and the first quarter of 2024.

The budget deficit is expected to reach $1.5 trillion in 2023. With the retirement of the baby boomer generation, important insurance programs such as federal healthcare have lost their important tax sources. In order to fill the vacancy, the US Treasury Department "robs Peter to pay Paul", and also increased the quarterly issuance of treasury bond.

Secondly, both parties in the US Congress have failed to establish a long-term stability mechanism on the debt issue.

As early as May 2022, in a report, Fitch lowered the credit expectation of the United States from "stable" to "poor", saying that the US debt ceiling crisis brought uncertainty. At that time, lawmakers from both parties in Congress had a heated argument over the debt ceiling agreement. It was not until June 2 of the same year, three days before the deadline for the government's cash and special measures to be used up, that US President Biden finally signed the debt agreement, avoiding default.

Fitch Ratings pointed out that "over the past two decades, the governance level of the US government has been deteriorating, especially in fiscal and debt related issues.". Policy analyst Ed Mills also stated that Fitch's decision indicates that even if an agreement is reached, there has been no structural change in the way the US government handles its debt ceiling.

In addition, there is significant political instability in the United States.

Fitch has repeatedly told officials in the Biden administration that the "Capitol Hill riots" that occurred after the 2020 election results were announced were also a major reason for the credit rating downgrade.

The reaction of both parties in the United States seems to confirm Fitch's concerns to some extent.

Bloomberg pointed out that Fitch's decision to downgrade the US credit rating was originally intended to sound an alarm for the country's worrying fiscal situation, but it went against expectations. This decision not only did not attract the attention of US lawmakers, but also intensified the "donkey elephant dispute".

Faced with a sudden credit downgrade, the Republican and Democratic parties in the United States are busy throwing blame at each other. Republican lawmakers argue that the main responsibility for the downgrade lies with Biden, and it is Biden economics that has increased government spending and fiscal burden. The White House, on the other hand, stated that former President Trump's recklessness and blindness were the main culprits.

Market volatility, quadruple impact

This latest change has attracted widespread attention from global market participants and economists. After the opening on August 2nd, in the United States, US stock futures fell and Dow Jones futures fell by about 100 points. On a global scale, Asian stock markets such as the South Korean Composite Stock Index and the Tokyo Stock Exchange are experiencing overall weakness.

Some investors and analysts believe that Fitch's downgrade of the credit rating of the United States may aggravate the anxiety about the country's debt situation, political polarization and the global status of the dollar, and hit the overall reputation and image of the United States.

According to American media reports, Robert Tip, Chief Investment Strategist and Global Bond Director at Prudential Securities, lamented that the US fiscal framework and budget surplus of the 1990s have disappeared, replaced by a huge deficit, as well as more frequent government shutdowns and debt defaults

According to Thierry Witzman, a financial market economist at Macquarie Group, Fitch's downgrade may shake the global dominance of the US dollar, and a multipolar order that relies on multiple currencies, cryptocurrencies, or commodities may become the new normal.

"Although currently, credit ratings do not lead to a surge in borrowing costs," said Mark Godwin, Senior Vice President of the Federal Budget Accountability Committee, an independent research firm in the United States. "However, if the US credit rating is further downgraded, it will ultimately endanger the financial health of the federal government."

Michael Schulman, Chief Investment Officer of RunningPoint Capital Advisors, bluntly stated, "The overall image of the United States is still considered strong, but this incident has undoubtedly left cracks in our armor. It is a blow to the reputation and status of the United States."