In a significant move, Fitch, the international credit rating agency, has downgraded the credit rating of the US federal government for the second time. The downgrade was from AAA to AA+ and was prompted by concerns over the country’s economic prospects.
Fitch cited “expected fiscal deterioration over the next three years” as the primary reason for the downgrade. The agency expressed worry over the high and growing general government debt burden and a decline in governance compared to ‘AA’ and ‘AAA’ rated peers over the last two decades. These concerns were evident in repeated debt limit standoffs and last-minute resolutions.
This downgrade echoes Fitch’s previous warning in June, following a showdown over the debt ceiling that nearly led to a default. A deal was struck just in time to prevent default, but the situation raised serious concerns about the government’s financial stability.
The deal to avert the threatened default in June resulted in a series of agreements about budgetary limits over the next several years. These agreements were largely shaped by Republican lawmakers’ demands, seizing the opportunity presented by the debt ceiling crisis to achieve spending cuts that they couldn’t attain during regular legislative negotiations.
The last time the US government’s credit rating was downgraded was in 2011, during a similar budget standoff that narrowly avoided a government default.
US Treasury Secretary Janet Yellen expressed strong disagreement with Fitch’s decision, calling it “arbitrary and based on outdated data.” Yellen highlighted that Fitch’s quantitative ratings model had declined between 2018 and 2020, despite improvements in many indicators during the current administration. She emphasized that Treasury securities remain a preeminent safe and liquid asset, and the American economy remains fundamentally strong.
Moody’s, another rating agency, has so far maintained the US government’s highest rating despite the challenges and uncertainties faced by the nation. The situation continues to be closely monitored by investors and global financial markets, keeping a keen eye on the US government’s fiscal policies and economic developments.
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