Fitch Ratings, one of the three major credit ratings firms, has downgraded the long-term credit rating of the United States from AAA to AA+. The agency cited the nation’s high and growing debt burden, as well as its penchant for brinkmanship over its authority to borrow money, as factors that have eroded confidence in its fiscal management.
This downgrade comes just two months after the United States narrowly avoided defaulting on its debt. Lawmakers spent weeks negotiating over whether the country should be allowed to take on more debt to pay its bills, ultimately reaching a last-minute agreement to suspend the nation’s debt ceiling. However, the ongoing dueling over federal spending, including the prospect of a government shutdown this fall, played a major role in Fitch’s decision to downgrade America’s debt.
Fitch also pointed to the growing levels of U.S. debt in recent years, as lawmakers passed new tax cuts and spending initiatives. The agency noted that the U.S. has made only limited progress in tackling challenges related to the rising costs of programs such as Social Security and Medicare, which are expected to soar as the population ages.
The downgrade by Fitch could potentially limit the number of investors able to buy U.S. government debt, as some investors are bound by constraints on the quality of the debt they can buy. This could nudge up the cost of the government’s borrowing at a time when interest rates are already high. However, most analysts believe that the impact will not be severe given the size of the Treasury market and the ongoing demand for U.S. Treasury securities.
The Biden administration has criticized Fitch’s decision, arguing that it does not reflect the health of the U.S. economy. Treasury Secretary Janet L. Yellen described the change as arbitrary and noted that Fitch’s ratings model showed U.S. governance deteriorating from 2018 to 2020 but did not make changes to the U.S. rating until now.
Lawmakers and the White House have reached a debt limit agreement that cuts federal spending by $1.5 trillion over a decade. However, it is unlikely that the Fitch downgrade will convince lawmakers to drastically change the fiscal trajectory of the United States.
Overall, the downgrade by Fitch is a blemish on the nation’s record of fiscal management and highlights the challenges the U.S. faces in addressing its growing debt burden and political standoffs over federal spending.
What role did the last-minute compromise play in preventing the United States from defaulting on its debt?
Y reaching a compromise at the last minute.
Fitch Ratings, a renowned credit ratings agency alongside two others, has recently announced a downgrade in the long-term credit rating of the United States. The country’s rating has been lowered from AAA to AA+, as Fitch cited several factors that have undermined confidence in its fiscal management.
One of the key factors behind this downgrade is the United States’ substantial and increasing debt burden. Over time, the nation’s debt has reached worrying levels, raising concerns about its ability to effectively manage its finances. This has significantly impacted its creditworthiness, leading to a revision in its credit rating.
Another contributing aspect is the United States’ tendency to engage in brinkmanship over its authority to borrow money. The country has witnessed politicians engaging in prolonged and contentious debates over whether it should be allowed to incur more debt in order to fulfill its financial obligations. These episodes of uncertainty and last-minute compromises have significantly eroded confidence in the nation’s fiscal management, further influencing Fitch Ratings’ decision to downgrade its credit rating.
Interestingly, this downgrade occurs just two months after the United States narrowly evaded defaulting on its debt. Lawmakers engaged in lengthy negotiations, deliberating whether the country should be permitted to acquire additional debt to meet its financial commitments. Eventually, a compromise was reached in the nick of time, averting a potential default.
Overall, Fitch Ratings’ decision to lower the United States’ credit rating highlights concerns surrounding the nation’s high and escalating debt burden, as well as its tendency to engage in brinkmanship over borrowing authority. These factors have undoubtedly eroded confidence in the country’s fiscal management and call for attention towards addressing its financial challenges effectively.
