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Fitch downgrades US credit rating after debt limit standoffs

2023-08-02 07:18
Fitch downgraded the United States' top-tier credit rating by a step on Tuesday, citing a growing federal debt burden and an "erosion of governance" that...
Fitch downgrades US credit rating after debt limit standoffs

Fitch downgraded the United States' top-tier credit rating by a step on Tuesday, citing a growing federal debt burden and an "erosion of governance" that has manifested in debt limit standoffs.

The decision sparked a fiery rebuttal from the White House, with press secretary Karine Jean-Pierre saying the move "defies reality."

Treasury Secretary Janet Yellen said in a separate statement that she "strongly" disagreed with Fitch as well, calling the change "arbitrary and based on outdated data."

It is the first such downgrade by a major ratings company in more than a decade. A debt ceiling impasse in 2011 saw S&P lower Washington's AAA rating, drawing bipartisan outrage.

"The rating downgrade of the United States 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 peers, said Fitch in a statement on Tuesday.

It added that there was a stable outlook assigned.

Yellen said Fitch's quantitative ratings model declined between 2018 and 2020 but the agency was only announcing its change now despite progress seen in indicators.

She argued that US "Treasury securities remain the world's preeminent safe and liquid asset, and that the American economy is fundamentally strong."

While the lifting of the US debt ceiling -- a limit on government borrowing to pay for bills already incurred -- was often routine, it has for several years become a contentious partisan issue.

- 'Steady deterioration' -

In May, Fitch had placed the country's credit on "rating watch negative," reflecting increased political partisanship that hampered a resolution to raise or suspend the debt limit ahead of a looming deadline.

While lawmakers reached a bipartisan agreement to avert a catastrophic default, Fitch in June kept the US on negative watch.

"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 agency said Tuesday.

"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," Fitch added.

It also said the US government "lacks a medium-term fiscal framework" and has seen only "limited progress" tackling challenges related to rising social security and Medicare costs as the population ages.

This year, hard-right Republicans dominating their party's narrow majority in the House of Representatives decided to use the debt limit vote as leverage for forcing President Joe Biden into accepting cuts to many Democratic spending priorities.

This triggered a test of political strength that threatened to end in chaos before the two sides reached an agreement.

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