Fitch downgraded the US credit rating in anticipation of a growing budget deficit

The international rating agency Fitch downgraded the US credit rating by one notch – from AAA to AA +, noting, in addition to the expected weakening of budget discipline, the “deterioration in the quality of management” of the country’s debt burden – here the agency referred to regularly arising disagreements in Congress on raising the public debt ceiling. Such a decision by rating agencies was the first since 2011, when Standard & Poor`s announced a similar rating downgrade. The country’s Treasury called the decision “unreasonable and based on outdated data,” but Treasury Secretary Janet Yellen has previously pointed to the costs of making decisions at the last moment.

The international rating agency Fitch has downgraded the US long-term issuer default rating to AA+ from AAA. Prior to the downgrade, the country’s credit score was under review with a negative outlook. Now the rating is set with a stable outlook, which means that the agency does not plan to change its own assessment in the short term. Previously, the US rating was downgraded by Standard & Poor`s (also by one notch, to AA +), but this decision was made back in 2011.

In the comments to the decision, Fitch pointed to an expected deterioration in fiscal discipline over the next three years, a high (and growing) debt burden, as well as a deterioration in the quality of governance compared to other countries with AA and AAA ratings.

The last point, as explained by the agency, is connected with recurring situations of confrontations around raising the ceiling of the national debt, as well as making decisions at the last moment.

“This reduces confidence in the quality of fiscal policy,” the statement said. It also notes the lack of medium-term planning in relation to the budget.

Recall that in June, both houses of Congress were able to agree the postponement of the public debt ceiling until January 2025, but this happened only a week before the date of the planned exhaustion of the Finance Ministry’s ability to finance budget expenditures. In fact, such a period will allow postponing the solution of the problem of the debt burden until the presidential elections in the United States and the formation of a new composition Congress (in fact, the problem of the limit may arise no earlier than August-September 2025).

Treasury Secretary Janet Yellen called Fitch’s decision “unreasonable and based on outdated data”, but Ms. Yellen has repeatedly stated the negative consequences of last-minute decisions on the national debt ceiling, in particular, it leads to an increase in the required yield on short-term bonds.

Fitch also points to the deterioration of budget performance this year: against the backdrop of rising cost of servicing public debt, as well as an increase in budget spending and cyclical easing affecting tax collections, the US budget deficit, according to Fitch’s forecast, may grow to 6.3% GDP against 3.7% a year earlier. The total US public debt this year is expected to be 112.9% of GDP. This is lower than the 122.3% of GDP at the height of the pandemic in 2020, but still well above the pre-pandemic 2019 level, when debt was 100.1% of GDP.

Tatyana Edovina