The FTSE 100 plunged into the red today after Fitch downgraded the US government’s credit rating in a decision labeled “arbitrary” by the country’s Treasury Secretary.
The world’s largest economy has been stripped of its highest credit rating by the agency, two months after it nearly defaulted.
Steven Ricchiuto, chief US economist at Mizuho Securities, said the downgrade “essentially indicates that US government spending is a problem.”
Furious: Janet Yellen called Fitch’s decision ‘arbitrary’
In making his decision, Fitch cited fiscal deterioration over the next three years and reiterated down-the-wire debt ceiling negotiations as threatening the government’s ability to pay its creditors.
Fitch first signaled the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved and said it planned to complete the assessment in the third quarter of this year.
With the downgrade, Fitch became the second major rating agency after Standard & Poor to strip the US of its triple-A rating.
Fitch’s move came two months after Joe Biden and the Republican-controlled House of Representatives reached a debt-ceiling deal that lifted the government’s $31.4 trillion loan cap, ending months of political shakiness.
Fitch said in a statement: “According to Fitch, there has been a steady deterioration in governance standards over the past 20 years, including on fiscal and debt issues, despite June’s bipartisan agreement to suspend the debt limit until January 2025.”
US Treasury Secretary Janet Yellen disagreed with Fitch’s rating downgrade, calling the decision “arbitrary and based on outdated data.”
The White House took a similar view, saying it “strongly disagrees with this decision.”
White House press secretary Karine Jean-Pierre added, “It defies reality to downgrade the United States at a time when President Biden has delivered the strongest recovery of any major economy in the world.”
Former US Treasury Secretary Larry Summers called the decision “bizarre and inept.”
Following the decision, the FTSE 100 fell 1.1 percent by mid-afternoon.
France’s CAC 40 lost 1.5 percent and Germany’s Dax fell 1.6 percent as investors shun riskier assets amid concerns over US debt servicing.
Opening US trading on Wednesday, the S&P 500 fell 0.27 percent, or 12.23 points, to 4,576.73, while Nasdaq Composite fell 0.43 percent to 14,283.91.
Michael Hewson, chief market analyst at CMC Markets UK, said: “It was a negative day for markets in Europe with only a handful of stocks in positive territory on the FTSE 100 after rating agency Fitch hit the US with a downgrade from its AAA rating. index. rating to AA+, leading to a sharp sell-off in Asian markets.”
He added: “The handful of stocks in positive territory on the FTSE100 included BAE Systems and Taylor Wimpey, both posting positive first half trading updates today.”
The immediate response from traders was a safe haven to exit equities and into government bonds and the dollar. A rally in government bonds means the US is paying relatively less to pay down its debt.
Analysts weigh up implications
Analysts said the move showed the depth of damage done to the US by repeated rounds of contentious debt ceiling debates that drove the country to the brink of bankruptcy in May.
“This basically tells you that US government spending is a problem,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.
Fitch said repeated political deadlocks and last-minute resolutions on the debt limit have eroded confidence in fiscal management.
Michael Schulman, chief investment officer at Running Point Capital Advisors, said that “generally the US will be seen as strong, but I think it’s a small hole in our armor.”
He added, “It’s a dent against the reputation and reputation of the US,” Schulman said.
Others expressed surprise at the timing, even though Fitch had signaled the possibility.
“I don’t understand how they (Fitch) have worse information now than they had before the debt ceiling crisis was resolved,” says Wendy Edelberg, director of The Hamilton Project At The Brookings Institution in Washington DC
Jason Ware, chief investment officer at Albion Financial Group, said: “I don’t think you’ll see too many investors, especially those with a long-term investment strategy saying I should sell stock because Fitch took us from AAA to AA+. .’
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to compromise our editorial independence.