Fitch downgraded the United States’ credit rating on Tuesday, citing “a steady deterioration in standards of governance over the last 20 years.”
Fitch Ratings – one of three major credit rating agencies in the U.S. – announced that it had lowered the U.S. government’s credit rating or long-term foreign-currency issuer default rating from a high ‘AAA’ rating to ‘AA+.’
“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 ‘AA’ and ‘AAA’-rated peers over the last two decades,” Fitch said in the news release.
The U.S. credit downgrade comes months after a political standoff and last-minute resolution between the Biden administration and House Republicans over whether or not to suspend the nation’s $31.4 trillion borrowing limit until January 2025.
Although both parties reached a bipartisan agreement to avoid a U.S. default, Fitch claimed continued political dysfunction in Washington has “eroded confidence in fiscal management.”
Despite Treasury Secretary Jannet Yellen taking “extraordinary measures” to stop a government default earlier this summer, her efforts did not prevent Fitch’s recent credit downgrade.
In response to the downgrade, Yellen called the decision “flawed” and “entirely unwarranted,” reported Reuters.
“Fitch’s decision is puzzling in light of the economic strength we see in the United States,” she said, per Reuters. “At the end of the day, Fitch’s decision does not change what all of us already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset, and that the American economy is fundamentally strong.”
This is not the first time the U.S. has received a credit downgrade from one of the big three credit rating agencies: Moody’s, Standard & Poor’s (S&P), and Fitch.
In 2011, S&P downgraded the U.S. from AAA status to AA+, marking the first time in the country’s history that a rating firm had lowered its assessment of the government’s propensity to pay its bills.
Other reasons Fitch gave for its credit downgrade included rising government debt, rising government deficits, unaddressed fiscal challenges, and recession concerns.
Similar to how a consumer credit score is used to determine a person’s creditworthiness, a country’s credit rating is used to gauge its capacity to pay off its debt.
According to ABC News, if investors lose faith in the United States’ ability to pay its debts on time, capital could end up leaving the equity and bond markets, investors could demand higher interest rates for loans, and U.S. debt could become more costly and difficult to service.
Not only does a lower credit rating negatively impact a country’s ability to service its debt, but it also makes that country “less able to respond to future crises,” according to Shai Akabas, director of economic policy at the Bipartisan Policy Center.
“The larger our debt becomes and the higher our interest rates are, the more of our federal taxes will go to paying interest on the debt, which isn’t creating anything of value for the economy or providing support for Americans,” said Akabas, reported ABC News.
The Dallas Express reached out to the media relations team at Fitch Ratings for additional information about the credit downgrade and for an explanation of the potential repercussions the U.S. could face from such a downgrade but had not heard back from the agency by the time of publishing.
