On Tuesday, the international rating agency Fitch downgraded US government bonds for the first time since 1994 from AAA to AA+ with a stable outlook.
Reasons for this downgrade include “the expected fiscal deterioration over the next three years, a high and growing general government debt burden”, as well as a general “weathering of government”.
The downgrade comes amid ongoing disagreement in the House of Representatives over the increase or possible lifting of the debt ceiling – an issue which, according to Fitch, has already “led to repeated political confrontations and resolutions at the last minute”.
The current Republican majority in the house regularly butt heads with the Democratic president, Joe Biden, over the debt ceiling in their efforts to maintain a more conservative monetary policy.
In response, Janet Yellen, head of the US Treasury, described this “unsolicited” downgrade as “arbitrary and based on outdated data”. According to Yellen, “government bonds remain the world’s leading safe and liquid asset” with the US economy “fundamentally strong”.
On Wednesday, the White House also strongly condemned the downgrade and labeled it as a decision that “undermines reality”.
Fitch’s decision marks the first downgrade by a major rating agency since S&P’s downgrade in 2011 following a similar disagreement over the debt ceiling that turned into an impasse.
Markets are reeling
Several markets worldwide opened on the back foot on Wednesday and closed weaker amid market uncertainty in the US.
By market close on Wednesday, the S&P 500 was down 1.4%, the Nasdaq down 2.2% and the Dow down 1%. Markets in Asia echoed this weakening with the Nikkei 225 in Tokyo showing its biggest single-day drop of the year with a fall of more than 2%. In Europe, the French DAX and the FSTE 100 closed with a contraction of 1.4%, and the CAC 40 in Paris with a drop of 1.3%.
Although the downgrade has caused short-term uncertainty in financial markets, economists do not expect many negative long-term consequences.
John Canavan, chief US analyst at Oxford Economics, told AFP that he does not expect the Fitch move to have a “lasting market effect”.
“One key reason for that is that the S&P downgrade more than a decade ago already broke the dam on this front.”
But “psychological support for debt held in dollars” could take a hit in the short term.
Because the US maintains its AA+ rating with a stable outlook, this downgrade can therefore be largely regarded as symbolic, with Fitch itself expecting few long-term side effects.
Some with AAA status
Only a small group of countries still maintain a triple A rating from Moody’s, Fitch and S&P. Australia, Denmark, Germany, Luxembourg, the Netherlands, Norway, Singapore and Switzerland still enjoy this perfect rating.
Several other countries have a AAA from one or two of the agencies, which is the case with the USA which still has a triple-A rating with Moody’s.
Several countries in Europe were stripped of their triple-A rating by certain rating agencies in the midst of the 2008 financial crisis.
Sources: Fitch, AFP