Fitch Downgrades U.S. Credit Rating Amid Surge In Government Debt

The ongoing surge in public debt is beginning to take its toll on the credit markets. Credit rating agency Fitch has downgraded the United States’ debt rating from AAA to AA+ due to concerns over “governance erosion” resulting from repeated crises related to the country’s debt issuance limit. The agency cited an expected fiscal deterioration in the next three years and the “erosion of governance” caused by ongoing impasses on the debt limit and last-minute resolutions to avoid defaults.

Fitch also explicitly cited the nation’s high and growing public debt burden and highlighted the lack of a medium-term fiscal framework compared to other countries. The agency attributed successive increases in debt over the past decade to economic shocks, tax cuts, and new spending initiatives, coupled with a complex budget process.

Additionally, factors such as high inflation, a banking crisis, a mortgage crisis (which the government denies), and recessionary conditions since the end of 2021 have put strain on American taxpayers and impacted consumption, leading to the closure of major retail and service chains. Strangely, the January 6 ‘insurrection’ on Capitol Hill was also highlighted in discussion with the Treasury as it reflects the deterioration of governance and polarization.

This downgrade is not the first of its kind; a similar episode occurred in 2011, leading the S&P agency to reduce the US debt note, previously considered the safest in the world.

Despite Fitch’s action, Yellen emphasized that US Treasury bonds remain the safest and most liquid asset globally, and she believes in the strength of the US economy. However, there has been a steady deterioration in governance standards over the last two decades, particularly concerning budget and debt matters.

In June, the Biden government and the Republican opposition reached an agreement to suspend the debt ceiling until January 2025, avoiding a moratorium after a prolonged political battle. Fitch had warned in May that a downgrade was possible due to the risk of default.

Although Fitch’s outlook for the US credit rating remains stable, it highlights the need for improved governance standards and fiscal responsibility to address the country’s growing debt burden.

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