Fitch downgrades US credit rating from AAA to AA+

The international rating agency Fitch downgraded the US credit rating by one notch – from AAA to AA +, citing the growth of the budget deficit and public debt of this country, as well as noting the “deterioration in the quality of management” of the debt burden. Now the US Treasury is facing rising borrowing costs amid the rapid tightening of the Fed’s monetary policy, as well as pressure on budget revenues amid an expected slowdown in the economy. Fitch does not expect fiscal consolidation until at least the next presidential election, while the cost of servicing the debt will depend on how quickly the Fed can return to cutting rates. Fitch’s decision is unlikely to affect US borrowing costs, experts say.

Fitch has downgraded the US long-term credit rating by one notch from AAA to AA+. The agency issued a negative outlook on the previous credit assessment in May, against the backdrop of another debate on the need to increase the US national debt. The new rating outlook is “stable”, which means that the agency does not plan to change it in the short term. The downgrade was the first since 2011 and the second in history – the previous revision was made by Standard & Poor’s amid a dispute over the need to increase public debt and the adoption of a budget act. Only Moody’s retains the highest US rating (a negative outlook has been maintained for more than a decade).

In a commentary on the decision, Fitch pointed to the expected worsening of fiscal discipline over the next three years, as well as a high and growing debt burden. It also points to a “consistent deterioration in governance standards, including in fiscal and debt policy over the past 20 years” compared to other countries with similar ratings (only nine countries maintain their AAA rating according to all three international agencies – Germany, Denmark, the Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore and Australia).

US Treasury Secretary Janet Yellen called Fitch’s decision “unreasonable and based on outdated data.”

One of the main factors behind the rating downgrade, as follows from the agency’s explanations, was the regular political disagreements regarding the public debt ceiling and their resolution at the last moment.

This practice has become the norm for representatives of both parties – Democrats, as a rule, advocate increasing debt without reducing the deficit, while Republicans insist on reducing non-defense spending (primarily social). In June, both houses of Congress were able to agree on a postponement of the national debt ceiling until January 2025, but this happened only a week before the date of the planned exhaustion of the Treasury’s ability to finance budget expenditures.

The agency does not expect any significant fiscal consolidation measures on the eve of the 2024 presidential election and is rather pessimistic about the prospects for balancing the US budget – this year its deficit could grow to 6.3% of GDP against 3.7% a year earlier.

The next year, the deficit may reach 6.6% of GDP, in 2025 – 6.9%. At the same time, the level of public debt may rise from 112.9% this year to 118.4% in 2025, but the debt-to-GDP ratio is already two and a half times the average for countries with comparable ratings, which increases vulnerability to future economic shocks, Fitch notes. In fact, the postponement of the public debt ceiling allows you to postpone the solution to the problem of the debt burden for the period after the presidential elections in the United States and the formation of a new Congress (taking into account the use of the reserves of the Ministry of Finance, the problem of the limit may arise no earlier than August-September 2025).

The deterioration of fiscal discipline will also be affected by an increase in the cost of servicing debt (unlike in 2011, when the Fed announced that it plans to keep rates at near-zero levels, now the regulator is completing the fastest cycle of rate hikes since the 80s), and weak economic growth. Fitch expects the US to enter a “mild recession” in the fourth quarter of this year and the first quarter of next.

Anton Prokudin, chief macroeconomist at Ingosstrakh-Investments Management Company, notes that the US government debt in relation to GDP has continued to grow since the early 1980s, but the 1980s–2010s were a time of lower interest rates, so the cost of debt service was low in relation to budget revenues. Last year, it amounted to about 10% of budget revenues, by 2024, according to the agency’s forecast, it will grow to 15%. At the same time, the likelihood of a recession creates risks for budget revenues, including if it is necessary to support the economy. In turn, the expert associates the risks of rising yields on government bonds not with the rating, but with the continued tightening of the Fed’s monetary policy – these securities remain the least risky investment in the United States (within the paradigm of financial markets), so this change will not affect credit spreads, he believes Anton Prokudin.

Capital Economics notes that the decision to downgrade was made “at a strange time” when the economy is experiencing a decline in inflation without a recession – however, much will depend on the level of rates and the Fed’s ability to start cutting them as early as next year against the backdrop of a slowdown inflation. Otherwise, servicing the US public debt will cease to be sustainable, experts conclude.

Tatyana Edovina