August 3, 2023: On Tuesday, Fitch devalues the U.S. rating, noting “steady deterioration” in control. It came down to AA+ from AAA, pointing to “expected fiscal deterioration over the following three years,” an erosion of governance, and a growing general debt burden.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” said Fitch.
U.S. stock futures opened lower after the rating agency issued its downgrade, with Dow futures sliding about 100 points.
The agency placed the nation’s AAA rating on negative watch in May, blaming the debt top fight. At the time, lawmakers in Washington butted heads over an agreement that would keep the federal government from running out of money. President Joe Biden signed the debt ceiling bill on June 2, just days from the “X-date” on June 5.
The government’s current debt limit feud was mentioned again in Tuesday’s downgrade.
“In Fitch’s view, there has been a steady deterioration in governance standards over the previous 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limitation until January 2025,” the rating agency said.
Fitch highlighted the rising general government deficit, which anticipates will improve to 6.3% of the gross domestic product in 2023 from 3.7% in 2022.
“Cuts to non-defense discretionary spending as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term financial outlook,” Fitch said.
The agency also noted that tightening credit conditions, weakening business investment, and slow consumption could lead the economy into a “mild” slump in the 2023 fourth quarter and the first quarter of next year.
The White House disagreed with Fitch’s downgrade. “It defies reality to downgrade the United States at a moment when President Biden has delivered the most powerful recovery of any major economy in the world,” press secretary Karine Jean-Pierre said.
This is the first time a rating agency has downgraded the U.S. Standard & Poor’s cut the nation’s credit rating to AA+ from AAA in 2011 after Washington ordered to avoid a default. At the time, the agency highlighted political risk as part of its reason.
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