Rating agency Fitch has downgraded the US government’s credit rating from the highest rating of AAA to AA+.
The surprising move comes just two months after the agency warned its rating was under threat as lawmakers scrambled to raise the country’s debt limit — before avoiding what would have been a first-ever default.
In a statement, the rating agency said: “According to Fitch, there has been a steady deterioration in governance standards over the past 20 years.” It justified the downgrade by arguing that the country’s finances are likely to decline due to growing debt and political turmoil.
Following the news, Treasury Secretary Janet Yellen pushed back, calling the downgrade “arbitrary” and “obsolete.”
As Wall Street opened lower following the August 2 news — with the Dow Jones index down more than 100 points — experts have urged calm, saying the long-term impact is likely to be mild. Here, DailyMail.com explains everything you need to know about the decision – and the effect it could have on consumers.
Rating agency Fitch downgraded the US government’s credit rating on August 1, taking it down a notch from the highest rating of AAA to AA+
Why did Fitch downgrade US?
Fitch said the decision reflects a “governance erosion” in the US compared to other leading economies over the past two decades.
It said this included “fiscal and debt issues notwithstanding June’s bipartisan agreement to suspend the debt limit until January 2025.”
“Repeated political deadlocks over the debt limit and last-minute resolutions have eroded confidence in fiscal management,” the agency said.
In May, Fitch had placed his “AAA” rating of the US national debt pending a potential downgrade amid tense negotiations between President Biden and the Republican-controlled House of Representatives over raising the country’s debt limit.
The House of Representatives and Senate passed legislation in June, averting a catastrophic government default in days.
US debt has surpassed $31 trillion — and Fitch said it expected the economy to slide into recession later this year.
The new rating means that the agency no longer defines the US as the country with the “highest credit quality”, but still has “expectations of very low default risk”.
Treasury Secretary Janet Yellen, pictured, reacted to the ratings and said she strongly disagreed with the decision
Why do investors rely on ratings?
Investors rely on credit ratings to assess the risk of major borrowers, such as governments, defaulting on their debts.
The US government, which runs the world’s largest economy and controls the dollar, is largely considered one of the safest borrowers.
Treasury Secretary Yellen stressed that the rating downgrade would not change investors’ view of US government debt.
According to Luke Tilley, chief economist at Wilmington Trust, banks and investors are unlikely to abruptly move away from their reliance on government bonds as a safe-haven benchmark following the actions of a single rating agency. Wall Street Journal.
However, measures such as Fitch’s are incrementally eroding the confidence global financial markets place in the creditworthiness of the US government, he told the outlet.
Globally, Fitch is considered the smallest of the ‘big three’ rating agencies – and Moody’s still gives the US the highest rating.
What does the move mean for the markets?
The downgrade marks the first time a credit rating agency has lowered its overall assessment of the government’s ability to pay its bills since 2011 — when S&P downgraded the U.S. government’s credit rating.
“It’s clear that S&P was the first to downgrade 12 years ago, was much bigger news and allowed investors to adjust to the fact that the world’s most important bond market is no longer pure AAA,” said Jim Reid, a strategist at Deutsche Bank. Bank. from Baron“but it’s still a big decision.”
In 2011, the first trading day after the downgrade, the S&P 500 index lost nearly 7 percent.
Meanwhile, the index was down about 1 percent on Aug. 2 following Fitch’s announcement.
Shortly after the opening bell, the Dow Jones Industrial Average fell 146 points, or 0.4 percent, and the Nasdaq Composite retreated 1.1 percent.
Few investors believe the downgrade will have any long-term impact on financial markets – with most of the focus on the Federal Reserve’s aggressive cycle of rate hikes to curb inflation.
Richard Saldanha, a global equity fund manager at Aviva Investors, shared BloombergWhile Fitch US’s downgrade is noteworthy, we don’t think it will have a significant impact from an investment perspective – investors are also now much more focused on inflation (where we see a gradual easing based on recent data) as confirming signs of the Fed that we are now near the peak of the hiking cycle.”
The S&P 500 index fell about 1 percent on August 2 after the announcement
Wall Street opened lower on Wednesday after rating agency Fitch misled investors with an unexpected downgrade of the US government’s credit rating
What consequences could this have for consumers?
Experts predict the announcement is likely to have little effect on consumer investment and retirement pots — if markets continue to largely shake it off.
“We believe that the downgrade of the US credit rating will have no material impact on equity markets, US Treasuries or the US dollar,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. Bloomberg.
“Although the downgrade came at a surprising time, it is not unjustified given the large deficit of the US government and the absence of an expected deficit reduction in the next three to five years.”
He added: “All in all, this is a storm in a teapot.”
Alec Phillips, an economist at Goldman Sachs, told the outlet: “The downgrade should have little direct impact on financial markets as it is unlikely that there are major Treasury holders who would be forced to sell based on the rating change. ‘