US stripped of top credit rating as budget deficits swell

The US was stripped of its top-tier sovereign credit grade by Fitch Ratings, which criticised the country’s ballooning fiscal deficits and an “erosion of governance” that has led to repeated debt limit clashes over the past two decades.

The credit grader cut the US down one level from AAA to AA+, echoing a move made more than a decade ago by S&P Global Ratings. Tax cuts and new spending initiatives coupled with multiple economic shocks have swelled budget deficits, Fitch said, while medium-term challenges related to rising entitlement costs remain largely unaddressed.

“The rating downgrade of the United States 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 ‘AA’ and ‘AAA’ rated peers over the last two decades,” Fitch said in a statement.

US Treasury secretary Janet Yellen quickly responded to the downgrade, calling it “arbitrary” and “outdated.” US government bonds edged higher in early Asia trading after the Fitch announcement amid modest demand for haven assets.

“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset, and that the American economy is fundamentally strong,” Ms Yellen said in the statement.

Fitch had warned that it was weighing cutting the nation’s credit grade back in May, when Democrat and Republican lawmakers were at odds over raising the nation’s borrowing limit and the US Treasury was only weeks away from running out of cash.

While that crisis was ultimately averted, Fitch nonetheless said that the repeated debt-limit clashes and eleventh-hour resolutions have eroded confidence in the nation’s fiscal management.

Tuesday’s statement also attributed the downgrade to the country’s rapidly swelling debt burden, which it forecasts to reach 118% of gross domestic product by 2025, more than two-and-a-half times higher than the ‘AAA’ median of 39.3%. The rating company projects the debt-to-GDP ratio to rise even further in the longer-term, increasing America’s vulnerability to future economic shocks, the report said.

Several economic commentators were surprised by the news. Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, said on social media he was puzzled by “many aspects” of the announcement, including the timing.

“The United States faces serious long-run fiscal challenges,” said former Treasury secretary Larry Summers in a similar posting. “But the decision of a credit-rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept.” – Bloomberg