Fitch Ratings – one of the world’s “Big Three” credit rating agencies – has removed the United States from its position among the very highest tier of long-term lending counterparties.
The nation’s Long-Term Foreign-Currency Issuer Default Rating (IDR) slid from AAA to AA+ on Tuesday, prompting criticisms against Fitch from both the U.S. Treasury Department and the White House.
Why The Downgrade?
According to Fitch, the downgrade reflects expectations of “fiscal deterioration,” the country’s “growing general government debt burden,” and an “erosion of governance” regarding how to manage that debt relative to its AA and AAA-rated peers.
Firstly, the government deficit has been rising over time and is expected to reach 6.3% by the end of 2023, versus 3.7% at the end of 2022. Fitch attributes the expected rise to “weaker government revenues, new spending initiatives, and a higher interest burden.”
“Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025,” the agency added.
The sheer size of the nation’s debt also dwarfs nations within comparable credit rating categories. The United States’ debt-to-GDP ratio is expected to reach 118% by 2025, which is nearly three times the AAA median of 39.3%.
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As debt rises, so will the country’s interest burden, which Fitch expects interest payments alone to comprise 3.6% of GDP by 2033.
So far, negotiations to address that debt have proven consistently chaotic in the United States over the past two decades. Fitch cited the bipartisan agreement in June, where Congress agreed to suspend the nation’s debt limit entirely until January 2025 – after the next federal election.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” wrote Fitch. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”
Government Responds
U.S. Treasury Secretary Janet Yellen was not pleased with Fitch’s downgrade, calling their decision “arbitrary and based on outdated data.” She said she has seen progress in many economic indicators used by Fitch, “including those related to governance.”
Meanwhile, White House Press Secretary Karine Jean-Pierre said the downgrade “defies reality” in a Tuesday statement, claiming that the President has “led the strongest recovery of any major economy in the world,” and blamed Republicans for previously “cheerleading” a debt default.
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