Fitch Downgrades U.S. Long-Term Credit Rating to AA+ from AAA
Fitch Downgrades U.S. Long-Term Credit Rating to AA+ from AAA
Fitch Ratings has downgraded the United States' long-term foreign currency issuer default rating to AA+ from AAA. The downgrade is attributed to the expected fiscal deterioration over the next three years, an erosion of governance, and a growing general debt burden. Repeated debt-limit political standoffs and last-minute resolutions have also contributed to the erosion of confidence in fiscal management.
Implications of the Downgrade
The downgrade puts the U.S. in the company of New Zealand and Canada, and below AAA countries, such as Denmark and Germany. Fitch's ratings, along with Moody's and S&P's, are closely watched by market participants and economists around the world. The U.S. still has a AAA rating from Moody's, while S&P's U.S. rating is AA+.
Market Reaction
Global stock markets tumbled following the announcement of the downgrade. Asian stocks and U.S. Treasury yields declined, with MSCI's broadest index of Asia-Pacific shares sliding 1.9%, Japan's Nikkei dropping by 1.8%, and Australian shares tumbling 2.3%. In early European trades, the pan-region Euro Stoxx 50 futures were down 0.7%, German DAX futures fell 0.8%, and FTSE futures declined 0.5%. However, several investors and analysts expect the impact of the downgrade to be limited.
Factors Contributing to the Downgrade
Fitch predicts a recession for the U.S. economy at the end of this year and into 2024, which will slow annual real GDP growth and leave job vacancies higher than pre-pandemic levels. The Federal Reserve's continued tightening, Social Security being depleted within a decade, higher deficit predictions, increased fiscal vulnerability to future economic shocks, and more were listed as reasons for the drop in rating.
Reactions to the Downgrade
U.S. Treasury Secretary Janet Yellen issued a statement pushing back on Fitch's move, saying the rating agency was using old data and arguing conditions have improved under the Biden administration. "I strongly disagree with Fitch Ratings’ decision," Yellen's statement said. "The change by Fitch Ratings announced today is arbitrary and based on outdated data."
In conclusion, Fitch Ratings has downgraded the United States' long-term foreign currency issuer default rating due to concerns about fiscal management, governance, and debt. The impact of this downgrade on the U.S. economy and investor confidence remains to be seen.