Fitch Downgrades U.S. Debt Rating Citing Deteriorating Governance

Brian Turner
02 Aug, 2023
New York City

Fitch Ratings lowered its credit rating for the U.S. long-tern credit to AA+ from AAA citing persistent governance issues. 

Rating agencies have been slow in downgrading the U.S. debt, despite more than a decade of weakening governance, rising debt levels and outsized military spending. 

Fitch also noted that the U.S. government deficit is expected to rise to 6.3% in 2023 from 3.7% in 2022 

Fitch said the combination of tightening credit conditions, a slowdown in consumption because of elevated prices and weakening business investment could lead the economy into a "mild recession" in the final quarter of this year and first quarter of the next year. 

Fitch placed the U.S. long run foreign currency issuer default rating AAA on negative watch in May at the height of the politically fractious debt ceiling negotiations. 

The ratings agency highlighted “the repeated debt-limit political standoffs and last-minute resolutions” that have eroded market confidence in the country’s fiscal management. 

Two other credit rating agencies, Moody's and the Standard & Poor's, have not placed the U.S. debt default rating on a watch list. 

U.S. based credit rating agencies have a long history of downgrading debt ratings of emerging nations with the slightest hint of fiscal deterioration but have ignored the worsening fiscal and political environment in the U.S. over the last two decades. 

Fitch's downgrade drew quick comments from several officials from President Joe Biden's administration including Treasury Secretary Janet Yellen. 

“The change by Fitch Ratings announced today is arbitrary and based on outdated data,” Yellen said.

Fitch is the second credit rating agency to lower U.S. debt rating after Standard & Poor's lowered its rating to AA- from AAA in 2011. 

At that time lawmakers narrowly avoided a debt default after a last minute deal in Washington but left the nation vulnerable to future debt defaults.

Fitch had warned in May while placing the U.S. debt rating on its watch list, that a future downgrade is likely despite a last minute agreement between President Biden and House Speaker Kevin McCarthy in the final week of May. 

Lower U.S. debt rating is not expected to have an immediate negative impact to the stock market but could have longer term impact and cost more in interest rates. 

After the announcement, investors in Asia and Europe sought safety in other government bonds and currencies. 

The Japanese yen edged up 0.4% to 142.70 against the U.S. dollar and the Swiss franc inched up 0.2% to 87.70 U.S. cents.