On Tuesday, Fitch Ratings became the second of the “Big Three” credit rating agencies to downgrade its assessment of the US government’s credit worthiness, sparking debate in Washington. Fitch’s decision to drop US’ coveted “AAA” rating down to a “AA+” cited the government’s rising debt burden and political roadblocks like the fight over raising the debt ceiling.
This decision “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” compared with other countries with similar debt ratings, Fitch’s report stated.
The loss of a AAA rating reflects a major blow to the United States as trust in the American dollar is closely tied to the country’s ability to pay back its debts. If that ability is called into question, that trust could quickly disappear around the world.
A downgrade like this happened only once before in American history, during another debt ceiling standoff in 2011.
In 2011, Standard & Poor’s, another Big Three agency, downgraded its rating of the US debt for the first time ever. After that weekend, the S&P 500 plummeted by 6.5%, markets saw the worst meltdown since the crash of 2008, and it took six months for stability to return.
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However, in this instance, the markets had little reaction to news of the downgrade, US Treasuries reported no significant effect, and public officials even called Fitch Ratings and its data into question. “I strongly disagree with Fitch Ratings’ decision,” said Treasury Secretary Janet Yellen. “The change by Fitch Ratings announced today is arbitrary and based on outdated data.”
Similarly, former Treasury Secretary Lawrence Summers questioned the downgrade at a time when the economy seems stronger than expected, referring to the decision as “bizarre and inept” in a tweet. A follow-up post insisted that “nobody sensible should change their mind about anything on the basis of Fitch’s proclamation.”
The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept.
— Lawrence H. Summers (@LHSummers) August 1, 2023
JP Morgan Chase CEO Jamie Dimon also weighed in on the issue, calling the downgrade “ridiculous” when other nations with worse debt and better scores depend on the US for stability.
But despite the confidence of experts and officials, there remains a chance that the Fitch Ratings’ downgrade will have long-term implications for the country. Downgraded credit often means higher interest rates to offset the greater risk of default. If those increased rates are applied to US Treasury securities, the government would be forced to push up interest costs for taxpayers as well, potentially affecting pensions and investment funds.
For now, though, economists do not seem to think that such an outcome is likely and are assuring investors that their portfolios are safe for the time being.
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