A forecast fiscal deterioration and repeated down-the-wire debt ceiling negotiations have downgraded the US credit rating this week from AAA to AA+.
It is only the second time in the nation’s history that its rating has been cut and could result in higher interest rates on its notes, bills, and bonds.
Rating agency Fitch first warned of a downgrade in May and had kept the US on a negative watch.
It claimed repeated political standoffs around the debt limit and last-minute suspensions before the “x-date” (when the treasury effectively runs out of funds) had lowered its confidence.
Other factors such as a “steady deterioration” in governance over the last 15 years, increased political polarisation and rising fiscal deficits also contributed to the decision.
“The rating downgrade of the US reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance [relative to peers],” Fitch said in a statement.
“In [our] view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding [recent moves] to suspend the debt limit.”
Benchmark for lending
Investors use credit ratings as a benchmark for judging how risky it is to lend money to a government.
The US is usually considered a highly secure investment because of the size and relative stability of the economy however, this year saw another round of political brinkmanship over government borrowings.
New legislation
Last week, the US senate passed bipartisan legislation which lifts the government’s $31.4 trillion debt ceiling, following months of bickering between the Democrats and Republicans.
The bill states that the statutory limit on federal borrowing will now be suspended until January 2025, however, congress will still be able to approve additional money for emergencies, including helping Ukraine in its battle against Russia.
The treasury department had previously issued a warning that the nation would be unable to pay all its bills in early June if congress failed to act by then.
Analysts claim the credit rating downgrade reflects the fact that despite the new legislation, there have been no other structural changes to the way the government deals with its borrowing limit.
Mixed opinions
Economists have had mixed opinions on Fitch’s decision, calling it “bizarre and inept” and a “strange move” as the US economy “looks stronger than expected”.
Countries with the highest credit rating at Fitch, S&P Global Ratings and Moody’s Investors Service are now Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore and Australia.
Canada is rated AAA by two of the ratings companies.
