Fitch Ratings, a globally recognized credit rating agency, has announced a downgrade of the United States’ Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘AAA’ to ‘AA+’. This decision is a reflection of several concerns surrounding the fiscal health and governance standards of the U.S.
According to Fitch, the downgrade is primarily driven by the anticipated fiscal deterioration over the next three years, an escalating general government debt burden, and a decline in governance standards. Over the past 20 years, the U.S. has been plagued by repeated debt limit standoffs and last-minute resolutions, which have eroded confidence in its fiscal management. The absence of a medium-term fiscal framework, unlike most of its peers, coupled with a complex budgeting process, has further exacerbated these issues.
Fitch projects the U.S. general government (GG) deficit to rise to 6.3% of GDP in 2023, up from 3.7% in 2022. This increase is attributed to cyclically weaker federal revenues, new spending initiatives, and a higher interest burden. Although the GG debt-to-GDP ratio decreased from the pandemic high of 122.3% in 2020, it remains significantly above the pre-pandemic 2019 level of 100.1%, at 112.9% this year. Fitch anticipates this ratio to continue upward, reaching 118.4% by 2025.
Despite these fiscal challenges, the U.S. has several structural strengths supporting its ratings. These include its large, advanced, well-diversified, and high-income economy, bolstered by a dynamic business environment. Furthermore, the status of the U.S. dollar as the world’s leading reserve currency provides the government with exceptional financing flexibility.
However, Fitch warns of a potential mild recession in the U.S. economy in the fourth quarter of 2023 and the first quarter of 2024. This is due to tightening credit conditions, weakening business investment, and a consumption slowdown. The Federal Reserve’s interest rate hikes and the reduction of its holdings of mortgage-backed securities and U.S. Treasuries are further tightening financial conditions.
In response to this action by Fitch Ratings, White House Press Secretary Karine Jean-Pierre has issued a statement expressing strong disagreement with the decision. Jean-Pierre argues that the rating model used by Fitch declined under President Trump and improved under President Biden, making it unrealistic to downgrade the U.S. at a time when President Biden has delivered the strongest recovery of any major economy globally. She further criticizes the extremism of Republican officials, accusing them of cheerleading default, undermining governance and democracy, and seeking to extend deficit-busting tax giveaways for the wealthy and corporations, posing a continued threat to the U.S. economy.
U.S. Secretary of the Treasury Janet L. Yellen has also expressed strong disagreement. Yellen criticized Fitch’s decision as arbitrary and based on outdated data, highlighting the progress made in governance and fiscal management under the current administration. She emphasized that Treasury securities remain the world’s preeminent safe and liquid asset and that the American economy is fundamentally strong. Yellen also pointed out the recent economic recovery, with low unemployment rates, reduced inflation, and continued economic growth. She reaffirmed the commitment of President Biden and herself to fiscal sustainability, citing the recent debt limit legislation that included over $1 trillion in deficit reduction and improved the country’s fiscal trajectory.