Credit ratings agency Fitch has downgraded the United States’ long-term foreign currency issuer default rating to AA+ from AAA saying they “expected fiscal deterioration over the next three years” and pointing to what they said was a deterioration of governance and a growing general debt burden for the nation.
Fitch offers sovereign credit ratings that describe each nation’s ability to meet its debt obligations. The ratings are seen by investors as a mark of quality. Generally, if a credit rating is lowered the cost to the government of borrowing can increase, as investors will seek a higher interest in agreeing to loan funds.
This cost is ultimately borne by the taxpayer.
Fitch Ratings pointed to the repeated controversies in the United States around raising the debt ceiling – the amount of money that the government is legally allowed to borrow in order to meet spending commitments.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” said Fitch.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the ratings agency said.
Fitch also highlighted the rising general government deficit, which it anticipates will rise to 6.3% of gross domestic product in 2023, from 3.7% in 2022.
“Cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook,” Fitch said.
The agency said that tightening credit conditions, weakening business investment and a slowdown in consumption could lead the economy into a “mild” recession in the fourth quarter of 2023 and first quarter of next year.
The ratings downgrade is almost but not quite unprecedented.
In 2011, agency Standard & Poor cut the United States’ credit rating to AA+ from AAA in 2011 after a debt default was avoided, citing political risk.
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