Dear clients,
Fitch Ratings downgraded the US government’s top credit rating on Tuesday, prompting an angry reaction from the White House and surprising investors despite the resolution of the debt ceiling crisis two months ago.
The immediate reaction of traders was to move out of equities into government bonds and the dollar.
Fitch downgraded the U.S. to AA+ from AAA, citing deteriorating fiscal conditions over the next three years and repeated negotiations over the debt ceiling that threaten the government’s ability to pay its bills.
Fitch first indicated the possibility of a downgrade in May, and in June, after resolving the sovereign debt ceiling crisis, maintained that stance, saying it intends to finalise the review in the third quarter of this year.
With the downgrade, Fitch became the second major credit rating agency after Standard & Poor’s to strip the U.S. of its triple-A rating.
„In Fitch’s view, there has been a steady deterioration in governance standards over the past 20 years, including on budget and debt issues, despite the bipartisan agreement reached in June to suspend the debt limit until January 2025,“ the ratings agency said in a statement.
US Treasury Secretary Janet Yellen disagreed with Fitch’s downgrade, calling it „arbitrary and based on outdated data“. The White House took a similar view, saying it „strongly disagrees with the decision“.
Analysts said the move shows the depth of damage done to the United States by the repeated disputes over the national debt ceiling that brought the country to the brink of default in May.
Investors use credit ratings to assess the riskiness of companies and governments when they raise financing in debt capital markets. As a rule, the lower the borrower’s rating, the higher the cost of financing.
Experts pointed to the risk that another downgrade by one of the major rating agencies could affect investment portfolios that hold securities with the highest ratings.
However, Raymond James analyst Ed Mills said Tuesday that he did not expect the markets to react significantly to the news.
„My understanding is that after the S&P downgrade, a lot of these contracts were redesigned to say ‚triple-A‘ or ‚government-guaranteed,‘ and so the government guarantee is more important than the Fitch rating,“ he said.
