Wednesday, 24 April, 2024

Fitch Ratings Shocks Financial Markets With Its Downgrading of US Credit Rating


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Elizabeth Rowe, CC BY-SA 4.0, via Wikimedia Commons

On Tuesday, Fitch Ratings reduced the credit rating of US debt from the highest AAA to AA+, attributing this change to a “gradual decline in governance standards.”

This downgrade followed intense negotiations among lawmakers earlier in the year to address the debt ceiling, which raised concerns about the possibility of the nation’s inaugural default. Additionally, the events of the January 6th insurrection played a significant role in this decision.

During discussions with representatives of the Biden administration, Fitch Ratings underscored the January 6th insurrection as a notable governance issue affecting the US. However, this event was not explicitly mentioned in the official report detailing the downgrade.

Fitch Ratings did not provide an immediate response to CNN’s request for comment.

Historically, US debt has been regarded as an exceptionally safe investment, but this recent rating cut hints at a decline in its perceived stability. The repercussions of this downgrade could extend to various aspects, including mortgage rates for American homes and international contracts.

This action may lead investors to sell US Treasuries, potentially causing an increase in yields, which serve as benchmarks for interest rates across various types of loans.

Fitch’s rationale for the downgrade emphasized the projected deterioration of fiscal conditions over the next three years, an escalating and sizable government debt load, and a weakening of governance in comparison to other ‘AA’ and ‘AAA’ rated countries over the past two decades. This erosion in governance has been evident in repeated confrontations over the debt ceiling and eleventh-hour solutions.

Fitch clarified that the decision was not solely driven by the recent debt ceiling standoff but rather by a gradual decline in governance standards over the past two decades concerning fiscal and debt-related matters.

The response from Democrats to the downgrade was marked by disagreement. Treasury Secretary Janet Yellen expressed strong dissent, labeling Fitch Ratings’ decision as arbitrary and grounded in outdated data.

The White House press secretary, Karine Jean-Pierre, echoed this sentiment, highlighting concerns about Fitch’s modeling and emphasizing the detrimental impact of extremist behavior by Republican officials on the economy.

Senate Majority Leader Chuck Schumer attributed the downgrade to House Republicans’ actions, characterizing their approach as reckless brinksmanship that poses negative consequences for the nation.

The previous instance of a major credit rating agency downgrading US debt occurred in 2011 when S&P took similar action. On both occasions, the debt ceiling was ultimately raised after prolonged negotiations.

While S&P and Moody’s have maintained their AA+ and AAA ratings, respectively, Fitch’s new rating aligns the US with countries like Austria and Finland, falling below Switzerland and Germany.

Market reactions to Fitch’s downgrade were relatively subdued during after-hours trading, with the Dow Jones Industrial Average, S&P 500, and Nasdaq-100 futures experiencing modest declines of less than 1%.

Former Treasury Secretary Larry Summers criticized Fitch’s decision as “bizarre and inept,” especially given the stronger-than-anticipated state of the US economy. He shared his perspective on Twitter, now formally known as X.

 

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