On Tuesday 1st August 2023, Fitch, one of the acknowledged top three rating agencies, downgraded the United States top tier credit rating from AAA to AA+. This downgrade comes despite the debt resolution last June and came as a surprise to investors, exacting an angry response from the government.
Fitch pointed out that this downgrade was due not only to the increasing size of the country’s current fiscal deficits but pointed to fiscal deterioration over the next three years. Furthermore, this downgrade also includes last minute solutions to debt limit clashes seen over the past 20 years.
Fitch went on to say that the government’s fiscal and debt governance had deteriorated over the last two decades and they had already been considering cutting the credit rating last May, when, once again, lawmakers were clashing over increasing the country’s borrowing limit, leaving the US Treasury a few weeks away from running out of cash.
The retort from US Treasury Secretary Janet Yellen was that the “downgrade was arbitrary and based on outdated data”. She went on to say, “Fitch’s quantitative ratings model declined markedly between 2018 and 2023 – and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decisions”.
The White House responded by saying it strongly disagrees with this decision and their press secretary added that “It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world”.
The move by Fitch has had a mixed reaction in the markets, with some commentators advising that problems could now arise for those funds and index trackers who only have a AAA mandate, thereby forcing sales on purely compliance issues. Other experts suggested that taken at face value, this will be seen as a black mark or a dent in the reputation and standing of the United States. However, if, as result due to market nervousness, a risk-off move is fuelled, then paradoxically a move to a safe haven of buying US Treasuries may well occur.
Many commentators and analysts feel that this announcement will be dismissed by the markets rather than have a long-lasting effect on the US economy. One commentator pointed out that when S&P rating agency downgraded the United States rating in 2011 the risks for those holding investment portfolios that held top rated securities were reworked to say, “government guaranteed or triple-A”. Basically, a government guarantee is more important than a Fitch rating.