Ratings agency Fitch on Tuesday stripped the US of its prized AAA rating and downgraded it one notch to AA+, the first time this has happened since 2011.
The agency cited, among other factors, “a steady deterioration in standards of governance,” such as the country's repeated impasses over the debt ceiling.
“There has been a steady deterioration in standards of governance over the past 20 years", regarding "fiscal and debt matters", despite a June agreement, supported by both parties in the US Congress, to suspend the debt ceiling until January 2025, Fitch noted.
The administration of Democratic President Joe Biden and the Republican opposition had reached an eleventh hour agreement in early June, after several months of intense political battles, to raise the debt ceiling and avoid a US default. Despite this agreement, however, repeated political clashes over the debt ceiling and last-minute resolutions have eroded confidence in fiscal management, Fitch said.
The agency had warned at the end of May that it could downgrade the US rating due to the risk of default.
Other reasons for the downgrading include “the expected fiscal deterioration over the next three years"and "a high and growing general government debt burden,” Fitch said.
According to Fitch, the US government lacks a medium-term fiscal framework, unlike most of its peers, and has a complex budget process. These factors, along with several economic shocks, tax cuts and new spending initiatives, have contributed to successive increases in debt over the past decade, Fitch noted.
In addition, only limited progress has been made in addressing the medium-term challenges of rising pension and health insurance costs due to an ageing population, the ratings agency further noted.
However, the outlook has been raised from negative to stable, which means that Fitch does not anticipate any further downgrades in the short term.
This is the first time since 2011 that one of the three major rating agencies has downgraded the world’s largest economy. Back then, it was S&P that stripped the United States of its precious “triple A,” replacing it with an AA+ rating, in force today.
