Capital market company Fitch Ratings has downgraded the U.S. currency rating from AAA to AA+.
- On Tuesday, Fitch Ratings cut the long-term foreign currency issuer default rating for the U.S., citing an “erosion of governance,” noting that repeated debt ceiling standoffs eroded confidence in the federal government’s ability to be fiscally responsible.
- Fitch previously announced in May that the U.S.’s rating had been put on a negative watch during the debt ceiling negotiations.
- The stock market took a hit late Tuesday and then on Wednesday morning, with the Dow Jones sliding 214 points, while the S&P 500 (-0.9%) and Nasdaq Composite (-1.6%) saw drops, CNBC reports.
- The rating change is not unanimous, with other agencies like Moody’s Analytics continuing to hold the U.S. currency rating as pristine.
Why It’s Important
Fitch Rating’s announcement comes just weeks after the most recent round of debt ceiling fights that nearly resulted in a federal default until both sides came to an agreement at the last minute to push the issue to 2025. With the national debt nearing $32.7 trillion, the deficit increasing to 6.3% of GDP this year, and political infighting causing dangerous disruption and chaos, Fitch expects “fiscal deterioration over the next three years.”
“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,” says the company.
The downgrading itself is mostly symbolic. America continues to have a solid reputation for providing stable currency and Treasury bonds, serving as a critical benchmark for stocks and bonds in the global economy thanks to their high yields. As The Wall Street Journal notes, few investors believe the downgrading will challenge the dollar’s global prominence. Bloomberg economistic Mohamed El-Erian argues that the announcement will not weigh much for investors.
However, this is not the first time the U.S. has been challenged by its creditors. In 2011, Standard & Poor’s cut the credit rating from AAA to AA+, marking the first time the country’s rating had ever been downgraded, which briefly caused chaos on Wall Street. The decision was in response to a similar debt ceiling standoff, heightened bipartisan tensions, and insufficient efforts to guard the country’s financial outlook.
The Biden administration heavily castigated Fitch’s announcement, with Treasury Secretary Janet Yellen criticizing the decision as “arbitrary and based on outdated data,” noting that Treasury securities will remain the “world’s preeminent safe and liquid asset.” White House Press Secretary Karine Jean-Pierre added, “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.”