Fitch sees fiscal deterioration, downgrades US credit rating

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Agency cited ‘high and rising overall government debt burden’ in changing rating from ‘AAA’ to ‘AA+’. US Treasury Secretary criticized the decision. Fitch Ratings logo on its London office. Reuters Ratings agency Fitch on Tuesday downgraded its long-term foreign-currency credit rating from “AAA” to “AA+”, pointing to an expected fiscal deterioration over the next three years, as well as as a high and growing general government debt burden. US Treasury Secretary Janet Yellen disagreed with the downgrade. “I disagree with Fitch Ratings’ decision. The change announced by Fitch Ratings today is arbitrary and based on outdated data,” Yellen said in a statement. Investors use credit ratings to assess the risk profile of companies and governments when raising finance in the debt capital markets. The downgrade comes shortly after an agreement on the US debt ceiling, which was raised to $31.4 trillion. In an earlier debt ceiling crisis in 2011, ratings agency Standard & Poor’s cut the US top rating by one notch, from “AAA” to “AA+”, a few days after a deal on the debt ceiling, pointing to polarization. insufficient policy and measures to correct the country’s fiscal prospects. Its recommendation is still “AA+” — the second highest. Fitch had put its “AAA” rating on US sovereign debt on alert for a possible downgrade in May, citing downside risks, which include attrition in the political debate and a rising debt burden. What the agency says In Fitch’s view, there has been a continued deterioration in US governance standards over the last 20 years, including on tax and debt issues, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025 , which created distrust of fiscal management. In addition, the government lacks a medium-term fiscal framework and has a complex budget process. “These factors, along with various economic shocks, as well as tax cuts and new spending initiatives, have contributed to successive increases in debt over the last decade. Also, there has been only limited progress in addressing medium-term challenges related to rising costs. of social security and Medicare due to the aging of the population”, says a press release from the agency. Fitch also cites in the statement that it expects the government deficit to rise to 6.3% of GDP in 2023 from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. US state governments are also named, with the agency saying they are expected to run an overall deficit of 0.6% of GDP this year, after achieving a small surplus of 0.2% of GDP in 2022. of General Government Deficits: We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023 from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and an increased burden of interest. In addition, state and local governments are expected to run an overall deficit of 0.6% of GDP this year, after having achieved a small surplus of 0.2% of GDP in 2022. Fitch does not expect any further substantial measures of fiscal consolidation ahead of the November 2024 elections. The forecast is for a government deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. Larger deficits will be driven by weak government growth. GDP in 2024, a higher interest burden, and broader state and local government deficits of 1.2% of GDP in 2024-2025 (in line with the 20-year historical average). The interest-to-income ratio is expected to reach 10% by 2025 (compared to 2.8% for median ‘AA’ and 1% for median ‘AAA’) due to higher debt levels, as well as sustainably higher interest rates compared to pre-pandemic levels, the statement said.

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