Fitch is the second major agency to downgrade the United States’ rating. Everything has to do with the US debt crisis.
In a surprising move, Fitch cut the United States’ credit rating from AAA (the highest possible level) to AA+. Fitch is one of the three most prestigious rating agencies in the world.
Rating agencies like Fitch measure financial institutions and companies’ reliability. As this rating is based on the ability of the US to repay its debt, it considers the US from a purely financial angle.
The US sovereign debt is 20% larger than the overall GDP. At the moment, US debt amounts to $31,4 trillion, while its GDP is $23,3 trillion.
In the United States, there is a limit to how much debt the government can incur. Once this limit is breached, the government is forced to declare default. The so-called "debt ceiling", however, is raised with Congress’ agreement every time it is approached.
The latest of these debt ceiling crises took place in June when Republican speaker Kevin McCarthy tried to limit government spending in exchange for increasing the debt ceiling and, therefore, avoiding default.
Eventually, US President Joe Biden and McCarthy reached an agreement, removing the debt ceiling altogether until 2025 in exchange for welfare spending cuts. This way, President Biden does not have to worry about the debt ceiling until after the 2024 election or leave the matter to another president altogether.
What does Fitch’s rating mean
Fitch had already put the United States under watch in May when the debt-ceiling crisis reached its height. Once it was solved, however, Fitch confirmed the AAA rating of the United States in June.
It was unexpected for Fitch to downgrade the US credit today, three months after the crisis began, citing an uncertain future for the debt crisis. "In Fitch’s view," the statement reads, "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 White House disagreed with Fitch’s statement, pointing to the US economy’s significant recovery under the Biden administration. Treasury Secretary Janet Yellen called the rating system "arbitrary and based on outdated data."
Fitch is not the first major rating agency to downgrade the United States. Standard and Poor’s lowered the US rating to AA+ in 2011 and has left it unchanged since. When it happened it sent global markets into crisis, though they have not reacted to this new downgrade yet.
In any case, it represents a further dent in the US financial reputation. It’s a wake-up call to the US government and Congress that the debt ceiling cannot be increased forever. No country with a similar financial time bomb can be considered triple-A.
