Fitch Cuts to the U.S. Debt Ceiling: A Wake-Up Call to the Government’s Role in Managing America’s Finances
In response to how the government handled the debt crisis two months ago, Fitch Ratings cut the U.S. debt by one level, fromAAA to AA+. That move mirrored a similar downgrade by S&P in 2011, also following a debt ceiling standoff in Congress.
The downgrade comes two months after the Biden administration and House Republicans agreed to suspend the government’s debt ceiling in a last minute deal, narrowly avoiding a potentially disastrous federal default.
The agency warned of mounting red ink as well as the lack of confidence in the government’s ability to manage the country’s finances.
A key reason is that the reasons identified by Fitch — the “deterioration” of the country’s finances, the growing debt burden and the “erosion of governance” — are now widely known.
“Fitch’s decision doesn’t change what Americans, investors, and people around the world already know,” she said in a statement. “Treasury securities remain the world’s preeminent safe and liquid asset, and…the American economy is fundamentally strong.”
Spending limits adopted by the debt deal in June only cover a small portion of the budget, and they don’t address longer-term challenges in financing Social Security and Medicare for an aging population.
Tax cuts and government spending have led to widening government deficits in recent years. And with rising interest rates, the cost of bridging that gap has increased. In the first nine months of the fiscal year, government interest payments increased 25% compared to the same period a year ago.
The President of the Committee for a Responsible Federal Budget said today’s downgrade should be a wake-up call. “We are clearly on an unsustainable fiscal path. We have to do better.
The Fitch Ratings Downgrade Revisited: “The U.S. is no longer a top-notch debt country,” Goldman Sachs warned
It seemed that the country would never miss a payment, since U.S. government bonds were viewed as some of the safest investments in the world.
The US has always held a top-notch debt rating because of its status as the world’s biggest economy and the fact that it has never had to make up its debts.
S&P identified sharp political divisions as a key risk to the country’s ability to govern more than a decade ago, and many experts believe the divide has worsened since then.
Goldman Sachs, a top investment bank, put it bluntly on Wednesday: “The downgrade contains no new fiscal information,” adding the projections given by Fitch were similar to their own.
“It’s unlikely that the downgrade will have a big impact on the financial markets as major holders of Treasury securities will probably not be forced to sell them in the event of a ratings change,” Goldman said.
Losing the AAA rating further removes the U.S. from a small group of countries that still maintain the top-notch rating from all three major agencies. The group is made up of Australia, Netherlands, Norway, Singapore, Sweden and Switzerland.
Those are real problems — and failure to reverse the country’s surging deficits or bridge its political divisions — can have real critical consequences.
The markets slumped (although they eventually recovered) and President Obama addressed the downgrade in a news conference, with then-Treasury Secretary Tim Geithner angrily denouncing the S&P decision as flawed
During the 2008 Global Financial Crisis, a lot of the subprime mortgage bonds that went bust had been highly rated by the ratings agencies, exposing flaws in the system.
This is where it gets dicey. The agencies that issue ratings have been under a lot of fire.
The ratings for all three issues start with the top rated investment of AA and go down to D, which is a default, even though there are slight differences.
And just like your personal score, a credit rating helps determine how much interest a country or company will need to pay when they sell a bond or a security.