Rating Agency Fitch downgrades US credit rating from AAA to AA+

Fitch, one of the major independent rating agencies, took the unexpected step of downgrading the US government’s credit rating from AAA to AA+, drawing a strong reaction from the White House and surprising investors. This move occurred despite the resolution of the debt ceiling crisis two months prior. 

Fitch justified its decision by pointing to projected fiscal deterioration over the next three years and expressing concerns about the repeated last-minute debt ceiling negotiations, which could potentially put at risk the government’s ability to meet its financial obligations. 

Moreover, Fitch first flagged the possibility of a downgrade back in May and maintained that stance in June, even after the debt ceiling crisis was resolved. They intended to conclude the review in the third quarter of that year. By downgrading the US, Fitch joined Standard & Poor’s as the second major rating agency to remove the nation’s triple-A rating. 

Following the announcement, the dollar fell across a range of currencies, stock futures declined, and Treasury futures rose. However, many investors and analysts remained optimistic that the downgrade’s impact would likely be limited. 

Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs. 

Fitch’s decision came two months after President Joe Biden, a Democrat, and the Republican-controlled House of Representatives finally reached an agreement on the debt ceiling. This agreement put an end to months of political brinkmanship and resulted in the lifting of the government’s borrowing limit, which stood at USD 31.4 trillion. 

“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, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in a statement. 

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” it said.

Post announcement, there was a slight rise in Treasury 10-year futures, signalling a lower yield. Simultaneously, the dollar weakened against a basket of major currencies. 

In a past debt ceiling crisis in 2011, Standard & Poor’s downgraded the U.S. from “AAA” to “AA-plus” due to political polarization and inadequate fiscal measures. This caused a global stock market downturn, but U.S. Treasuries prices rose as investors sought safe-haven assets. 

Fitch had previously placed its “AAA” rating on watch for possible downgrade in May, citing risks like political brinkmanship and increasing debt burden.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions.