Fitch Ratings has downgraded U.S. credit from the highest rating, citing the nation’s growing debt and its eroding political stability.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters,” the ratings agency said Tuesday. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
The ratings agency also cited the U.S.’ “complex budgeting process” and its lack of a medium-term financial planning, relative to its peers, in explaining the downgrade to AA+, from the U.S.’ previous AAA level. These factors, combined with the fiscal shocks from the pandemic, new spending and tax cuts, have brought the debt to 113% of the national economic output, well above pre-pandemic levels.
Treasury Secretary Janet Yellen decried the new rating, calling it “arbitrary and based on outdated data.”
“Fitch’s decision does not change what Americans, investors and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong,” she said in a statement that touted the U.S.’ economic recovery from the coronavirus recession and the administration’s plans to reduce the budget deficit.
Reduced credit ratings could lead the U.S. to pay higher interest rates on Treasury notes, bills and bonds, according to the Associated Press.
“We strongly disagree with this decision,” White House press secretary Karine Jean-Pierre said in a statement. “The ratings model used by Fitch declined under President Trump and then improved under President Biden, and it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world.”
The U.S. last faced a debt downgrade in 2011, when Standard & Poor’s cut the nation’s rating one notch after prolonged wrangling in Congress brought the U.S. close to default.
Despite the downgrade, Fitch noted several positives the U.S. has going for it, including “its large, advanced, well-diversified and high-income economy, supported by a dynamic business environment” and the U.S. dollar’s status as the world’s reserve currency, “which gives the government extraordinary financing flexibility,” the ratings firm said.
