What is Fitch’s downgrade of U.S. about?
The Hindu
Fitch downgraded the U.S.A. rating to 'AA+' from 'AAA', citing fiscal deterioration, high debt burden and erosion of governance. Rating agencies assess creditworthiness and ability to meet payment obligations. 'AAA' is the highest rating, 'AA' denotes very low default risk.
The story so far:
On August 1, rating agency Fitch downgraded the United States of America’s (U.S.A.) rating to ‘AA+’ from ‘AAA’ — a rating that it had been holding at the agency since 1994. This was the first major downgrade for the country since Standard & Poor’s (S&P) actions in 2011. Fitch argued the downgrade cumulatively reflected the expected fiscal deterioration over the next three years, “high and growing” general government debt burden and the “erosion of governance” in comparison to similarly rated peers over the last two decades.
Before moving to the downgrade, it is pertinent to note that rating agencies are institutions that assess the creditworthiness or financial capability of a region, country, its institutions or individual organisations. They assess its ability to meet payment obligations — particularly important for those making investment decisions.
Fitch rates credit quality from ‘AAA’ (its highest rating) to ‘D’ (lowest rating). ‘AAA’ is assigned to entities with “exceptionally strong capacity for payment of financial commitments”. The downgrade in discussion, that is ‘AA’, denotes “very low default risk”, in other words, “very strong capacity for payment of financial commitments”. Important to note, both reflect strong profiles — varying only on a comparative basis.
Fitch held that there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters. This is despite the bipartisan agreement reached in June for suspending the debt limit until January 2025. The agency observed that the “repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
The second of the observations relates to lacking a medium-term fiscal framework, unlike most peers, and having a complex budgeting process. The agency noted that these combined with several economic shocks, tax cuts and new spending initiatives has led to successive increases in debt over the last decade.
Fitch expects the general government deficit (balance of income and expenditure) to rise to 6.3% of the GDP in 2023 from 3.7% in 2022. This results from cyclically weaker federal revenues, new spending initiatives and a higher interest burden.