On Tuesday, August 1, 2023, Fitch Ratings downgraded the United States’ credit rating from AAA to AA+. After 2011, This was the first time the credit ratings of the United States were Downgraded.
Here you have the details of the news.
Fitch downgrades US credit rating, White House calls it ‘Unjustified.’
The United States had the Highest Credit score in the last 70 years, and this downgrade rating shocked and surprised everyone. Fitch cited fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations as the reasons for the downgrade.
Fitch first flagged a downgrade likely in May amid US debt ceiling talks, then maintained that position in June after the crisis was resolved and said it intended to resolve the review in the third quarter of this year.
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The move comes despite the US debt ceiling crisis resolution two months ago. After months of political instability, Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement in May. The deal removed the government’s $31.4tn borrowing limit.
“In Fitch’s view, there has been a steady deterioration in governance standards over the past 20 years, including on fiscal and debt matters, despite a June bipartisan agreement to suspend the debt ceiling until January 2025,” the rating agency said in a statement. ,
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It added, “Repeated political deadlock over the debt ceiling and last-minute solutions have undermined confidence in fiscal management.”
There was little reaction in the world’s most traded currency pair, with the euro down less than 0.1% against the dollar at $1.098.
The dollar index, which tracks the currency against six peers, stood 0.23% higher at 102.24, shy of Tuesday’s three-week high of 102.43.
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“Even when there’s bad news … there is a behavior where businesses and people think, ‘I need my dollars to pay my invoices and dollar-denominated debts,” said Jane Foley, head of FX strategy at Rabobank.
“This is why I think there hasn’t been a huge push-back from this sort of news, because it doesn’t change the fact that people still need dollars worldwide.”
Meanwhile, The White House strongly disagrees with the downgrade credit rating, calling it “licentious and based on old data.” Treasury Secretary Janet Yellen disagreed with Fitch’s assessment of the US economy and its fiscal outlook.
Yellen said the US economy is “strong and resilient” and its fiscal position is “sound.” She said that the US government is committed to addressing its long-term fiscal challenges, but it is important to do so in a way that does not harm economic growth.
Yellen said she is confident that the US will continue to be a “safe and attractive place to invest.” She added the downgrade is “a reminder that we need to continue to work hard to strengthen our economy and fiscal position.”
The United States is already facing several challenges, including rising inflation, a potential recession, and the war in Ukraine. Also, a new presidential challenge as elections are coming next year.
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This credit ratings downgrade is a reminder that the US government needs to take action to address its fiscal problems and find a strategy to sort this out.
Raymond James analyst Ed Mills said he didn’t think the market would react this fast after the news on Tuesday.
“My understanding has been that after the S&P downgrade, many of these contracts were reworked to say triple-A or ‘government-guaranteed,’ and so the government guarantee is more important than the Fitch rating,” he said.
Mohamed El-Erian, the president at Queens’ College, said in a LinkedIn post “Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the US economy and markets,”
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