Fitch lowers the US credit rating to AA+: Why Washington is unhappy

The United States has lost its top AAA credit rating from Fitch, an American credit rating firm. The agency lowered the country’s long-term foreign currency ratings to AA+, citing a deterioration in fiscal governance standards since the US reached the brink of default in June. Other factors for the lowered ratings include mounting debt at the federal, state, and local levels, as well as a “steady deterioration in governance practises” over the last two decades. However, the new rating is still much higher than investment grade. The decision illustrates one way that growing political polarisation and repeated Washington standoffs over spending and taxes could end up costing US taxpayers. A lower credit rating, over time, could raise borrowing costs for the US government. It’s only the second time in the nation’s history that its credit rating has been cut. In 2011, the ratings agency Standard & Poor’s stripped the US of its prize AAA rating after a prolonged fight over the government’s borrowing limit. The Government Accountability Office, in a 2012 report, estimated that the 2011 budget standoff raised Treasury’s borrowing costs by $1.3 billion (Rs 10,708,425 crore) that year. At the same time, the huge size of the US economy and historic stability of the federal government has kept its borrowing costs low. Global investors often flock to US Treasury securities during periods of economic turmoil, lowering the interest rate paid by the US government. Why has Fitch pulled down the rating? Fitch had warned 24 May that it could remove the government’s triple-A rating as Congress again struggled to raise the borrowing limit. A deal was reached nearly a week later that suspended the limit and cut about $1.5 trillion (Rs 12,356,250 crore) from the government deficit over the next decade. Fitch cited the worsening political divisions around spending and tax policy as a key reason for its decision. It said, US governance has declined relative to other highly rated countries and it noted “repeated debt limit standoffs and last-minute resolutions.” [caption id=“attachment_12947232” align=“alignnone” width=“640”] It’s only the second time in the nation’s history that US’ credit rating has been cut. Reuters[/caption] Fitch informed Biden administration officials that the 6 January, 2021 insurrection was a factor in its decision to downgrade because it indicated an unstable government, according to a person familiar with the discussions between the administration and the rating agency. Fitch produced a report last year that showed government stability declined from 2018 to 2021, but increased since Biden assumed the presidency, said the person, who was granted anonymity to disclose private conversations. Another factor in Fitch’s decision is that it expects the US economy to tumble into a “mild recession” in the final three months of this year and early next year. Economists at the Federal Reserve made a similar forecast this spring but then reversed it in July and said growth would slow but a recession would likely be avoided. What has the White House said? Biden administration officials strongly criticised Fitch’s move. Treasury Secretary Janet Yellen said it was “arbitrary” and “based on outdated data.” Yellen noted that the US economy has rapidly recovered from the pandemic recession, with the unemployment rate near a half-century low and the economy expanding at a solid 2.4 per cent annual rate in the April-June quarter. The White House says it strongly disagrees with the decision. “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,” said White House press secretary Karine Jean-Pierre, reports Reuters. [caption id=“attachment_12947252” align=“alignnone” width=“640”] Some people were surprised by the timing, while others believe it will have little long-term impact. Reuters[/caption] Some also say that the governance flaws raised by Fitch occurred during the tenure of Joe Biden’s predecessor, former President Donald Trump. According to officials, the credit rating agency retained the AAA rating over those years. “This is a bizarre and baseless decision for Fitch to make now,” TOI reports a senior Biden administration saying. “It simply defies common sense to take this downgrade as a result of what was really a mess caused by the last administration and reckless actions by congressional Republicans,” the official added. What do experts think? Some people were surprised by the timing, while others believe it will have little long-term impact. According to Reuters, Wendy Edelberg, director of The Hamilton Project at The Brookings Institution, stated, “I don’t understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved.” Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta said, “This was unexpected, kind of came from left field.” He added, “As far as the market impact, it’s uncertain right now. The market is at a point where it’s somewhat vulnerable to bad news.” Raymond James analyst Ed Mills, however, said that he did not anticipate markets to react significantly to the news, as the government guarantee is more important than the Fitch rating. Mohamed El-Erian, President at Queens’ College, echoed the same views 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,” reports Reuters. With inputs from agencies