Fitch Ratings Downgrades US Debt to AA+ Citing “Erosion of Governance”
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Fitch Ratings Downgrades US Debt to AA+ Citing “Erosion of Governance”

Prominent credit rating agency Fitch downgraded the US sovereign debt from AAA to AA+ on Tuesday.
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Fitch, one of the top three credit rating agencies in the US, stripped the US sovereign debt of the top-tier grade, cutting it from AAA to AA+ on August 1. The decision comes due to an “erosion of governance” and growing government debt load, Fitch explained. 

Rating Cut Reflects Expectations of Fiscal Deterioration, Fitch Says

Credit rating agency Fitch downgraded the US sovereign credit grade on Tuesday, citing the country’s mounting fiscal deficits and an “erosion of governance” that resulted in frequent debt limit clashes over the past 20 years. 

Notably, the agency slashed the US credit rating from AAA to AA+, a move that last happened over a decade ago by another agency. According to Fitch, tax cuts, fresh spending programs, and multiple economic headwinds have led to broader budget deficits, while mid-term challenges associated with entitlement expenses remain ignored.

“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.

The downgrade triggered an immediate reaction among US investors, who moved out of stocks to seek shelter in safe-haven assets such as government bonds and the dollar. Meanwhile, White House representatives were not pleased with Fitch’s decision, considering the resolution of the debt ceiling crisis two months ago. 

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Last AAA Rating Cut Sent Stocks Tumbling in 2011

The last time the US credit lost its top-tier rating was when S&P Global Ratings cut the AAA grade by one notch during a debt ceiling crisis in 2011. The move, announced a few days after a deal on the debt ceiling was agreed, cited political polarization and insufficient measures to address the country’s fiscal outlook. 

The 2011 downgrade led to a decline in US stock prices, with the impact also expanding into the global stock markets, which were already battered by the euro-zone financial meltdown. 

Fitch’s latest rating cut comes less than two months after the agency placed the US sovereign debt’s AAA rating on watch. The rating provider said a potential grade cut was in the cards due to downside risks, political brinkmanship, and the ballooning debt burden. 

The market reaction to Fitch’s move was mixed, with some analysts pointing out risks of a knock-on effect, arguing that downgrades by other major rating agencies could affect investment portfolios that hold top-tier financial securities. Other analysts, such as Raymond James’s Ed Mills, think the rating downgrade would not trigger a significant market reaction. 

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Would Fitch’s move provoke debt rating cuts at other major agencies? Let us know in the comments below.