Fitch Ratings has recently lowered the US term foreign currency default rating, from AAA to AA+. This decision was primarily influenced by anticipated decline, erosion in governance and the increasing debt burden. The repeated standoffs over the debt limit have significantly undermined confidence. However Treasury Secretary Yellen contests this downgrade by highlighting the strength of our economy. It is worth noting that by 2025 there are predictions that our debt burden could surpass our GDP, which raises concerns about our vulnerability, in the future.
On Tuesday, Fitch Ratings lowered the United States’ long-term foreign-currency issuer default rating from AAA to AA+. This decision comes as Fitch points to anticipated fiscal deterioration over the next three years, compounded by an erosion of governance and an escalating general debt burden.
Fitch expressed concern about the diminishing confidence in fiscal management due to repeated debt-limit political standoffs and eleventh-hour resolutions. In fact, the rating agency had already placed the nation’s rating on negative watch in May, triggered by the debt ceiling clash in Washington, which ultimately found a resolution after weeks of negotiations.
This downgrade mirrors a similar action taken by S&P Global Ratings a decade earlier. Fitch attributes the decline in the country’s financial standing to a combination of tax cuts, new spending ventures, and the impact of various economic shocks. This has led to significant budget deficits while medium-term challenges linked to rising entitlement costs have gone largely unaddressed.
The Treasury Secretary, Janet Yellen, swiftly responded to the downgrade, denouncing it as “arbitrary” and “outdated.” Yellen emphasized that Fitch’s decision does not alter the widely acknowledged status of Treasury securities as the premier safe and liquid asset globally. She further asserted the enduring strength of the American economy.
The statement released on Tuesday also points to the rapidly expanding national debt burden, which Fitch forecasts to reach 118 percent of the gross domestic product by 2025. This projection is more than two-and-a-half times higher than the ‘AAA’ median of 39.3 percent. Fitch warns that the debt-to-GDP ratio is poised to rise even further in the long run, thereby heightening the nation’s vulnerability to future economic shocks.
Another focal point for Fitch is the increasing government deficit, which the agency anticipates will climb to 6.3 percent of the GDP in 2023, up from 3.7 percent in the preceding year.
In response to the downgrade, White House press secretary Karine Jean-Pierre rebuked Fitch’s decision, stating that it contradicts the reality of President Biden’s accomplishment in delivering the most robust economic recovery among major global economies.
