US Credit Rating Takes Hit as Fitch Announces Downgrade

Weeks after President Biden and congressional Republicans were on the verge of a historic default, Fitch Ratings lowered the U.S. government’s credit rating and issued a warning about Washington’s deteriorating political climate and mounting debt.

The downgrade, which is the first by a major ratings agency in almost a decade, is evidence that the political disagreements about the health of the U.S. government’s finances are obscuring the prognosis for the $25 trillion global market for Treasurys. The current Fitch rating for the United States is “AA+,” which is one notch below the top “AAA” grade.

Few investors think that role will be immediately threatened by Fitch’s downgrade. Nonetheless, it is the first time since Standard & Poor’s dropped its rating one notch below the top grade in 2011 that a ratings agency has lowered its headline assessment of the U.S. government’s likelihood to pay its obligations on time. That choice was made after yet another tense congressional debt-ceiling impasse.

Officials from the Biden administration questioned Fitch’s judgment, attributing governance issues to the Trump administration and claiming that the United States was not in danger of defaulting on its debt.

Only days before Yellen’s predicted cutoff date for when the government would be unable to pay all of its debts on time, Congress passed legislation suspending the borrowing cap.

After months of impasse between Democrats and Republicans, an agreement that limited federal spending and lifted the debt ceiling for about two years was finally reached.

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U.S. Deficit Projections Raise Concerns

Democrats rejected Republican demands for spending reductions for months, echoing earlier disputes over government borrowing. Fitch stated that it was considering rating the United States during the deadlock.

According to Fitch, the general government deficit will increase from 3.7% of GDP in 2018 to 6.3% of GDP in 2023. According to Fitch, the anticipated increase in the deficit is due to new spending programs, cyclically lower federal revenues, and a higher interest cost. The company predicts a recession in the U.S. economy later this year.

Credit ratings are used by both institutional investors and day traders to determine the likelihood that large borrowers, such as governments and corporations, would default on their obligations. For the right to borrow, institutions with low ratings often have to pay investors higher interest rates.

The United States government is generally regarded as one of the safest borrowers worldwide since it oversees the largest economy in the world and controls its most valuable currency.

A presumption that depends on unwavering faith in the government’s capacity to pay its obligations is that U.S. Treasury securities are as dependable and liquid as cash.

According to Luke Tilley, chief economist at Wilmington Trust, Wall Street banks and investors are unlikely to immediately stop using Treasurys as a safe-haven benchmark as a result of the actions of a single rating agency.

But actions like Fitch’s gradually erode the trust that international financial markets have in the creditworthiness of the U.S. government, he claimed.

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Source: MSN