Fitch slashes US credit rating, sending global stocks tumbling

Fitch has downgraded the US government’s credit ratings, rattling global markets on Wednesday.

The downgrade of the US’ long-term ratings to ‘AA+’ from ‘AAA’ comes two months after the Joe Biden administration staved off a debt ceiling crisis following a bipartisan agreement to suspend the limit until January 2025.

“The downgrade reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions,” Fitch Ratings said.

Global stocks declined on the downgrade as sentiment soured and investors pulled out of riskier assets. Asian stocks were headed for the biggest decline in about four months as technology shares plunged. The BSE Sensex declined 1.02% to 65,782.78 on Wednesday.

Fitch pointed to a steady deterioration in standards of governance in the US over the past 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement.

The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management, Fitch said, adding that the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. 

These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have led to successive widening of debt in the last decade, with only limited progress in tackling medium-term challenges related to rising social security and medicare costs, the rating firm said.

Incidentally, Fitch’s downgrade is the first time that a rating company has lowered its expectations of the US government’s capability to repay its dues since Standard and Poor’s cut its rating in 2011 following another standoff over the debt ceiling.

The US administration, meanwhile, came down heavily on the credit action, while putting the blame for “governance issues” on the earlier Trump administration 

“The change by Fitch Ratings announced today is arbitrary and based on outdated data,” Treasury Secretary Janet Yellen said in a statement.

“Fitch’s quantitative ratings model declined markedly between 2018 and 2020 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision. Many of these measures, including those related to governance, have shown improvement over the course of this administration, with the passage of bipartisan legislation to address the debt limit, invest in infrastructure, and make other investments in America’s competitiveness,” Yellen said.

Fitch said it expects a massive rise in the general governance deficit. “We expect the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives, and a higher interest burden,” it said.

The rating agency also projected that “tighter credit conditions, weakening business investment, and a slowdown in consumption will push the US into a mild recession by October-December 2023 and January-March 2024.

Analysts said Fitch’s rating downgrade could imply follow-on downgrades to US corporate credit that it rates.

“High inflation and growth remain the key triggers for bond demand,” analysts at Singapore’s DBS Bank wrote in a note. “Fitch’s rating downgrade should be largely mitigated by the substantial stock of US private wealth, with correspondingly high safe haven demand for US Treasuries.”