AAA Downgraded to AA+
"Repeated Debt Ceiling Conflicts"
Watching the Aftermath in Global Financial Markets
U.S. credit rating agency Fitch has abruptly downgraded the United States' credit rating from the highest level, AAA. The reason cited was the political risk arising from repeated conflicts in Congress over the federal government's fiscal deterioration and debt ceiling negotiations. This is the first time in 29 years since 1994 that Fitch has downgraded the U.S. credit rating.
On the 1st (local time), Fitch announced that it had lowered the U.S. credit rating (IDRs - Long-Term Foreign Currency Issuer Default Ratings) from 'Triple A (AAA)' to 'AA+'. The reasons for the downgrade included expected fiscal deterioration and increased federal government debt burden over the next three years.
Fitch explained, "Considering the expected fiscal deterioration over the next three years, the continuing increase in federal government debt burden, and the repeated deadlocks over the debt ceiling in the past 20 years, we have determined that governance in the U.S. is deteriorating compared to other countries with AAA ratings."
Fitch stated that this year’s debt-to-GDP ratio is 112.9%, still significantly exceeding the pre-pandemic 2019 level of 100.1%. The deterioration in governance compared to other AAA-rated countries was also cited as a cause for the downgrade. This is due to repeated cases where political parties clash over raising the debt ceiling and only reach a solution at the last minute.
Earlier in May, Fitch warned of the risk of a U.S. credit rating downgrade amid a federal government default crisis triggered by political disputes over the debt ceiling. At that time, Fitch maintained the AAA rating but revised the outlook to 'negative watch,' indicating a high likelihood of downgrade within six months. Fitch had maintained the U.S. credit rating at AAA since 1994.
This is the first time in 12 years since S&P Global downgraded the U.S. credit rating in 2011. S&P Global downgraded the U.S. credit rating by one notch to 'AA+' during the debt crisis in 2011. Moody’s Investors Service has stated that it continues to maintain the highest credit rating. As a result, among the three major international credit rating agencies, only one agency (Moody’s) still rates the U.S. credit rating at the highest level.
U.S. Treasury Secretary Janet Yellen criticized Fitch’s downgrade announcement, calling it "arbitrary and anachronistic," and said, "Fitch’s quantitative assessment model has significantly deteriorated between 2018 and 2020." She emphasized, "U.S. Treasury securities are safe and liquid assets, and the U.S. economy is fundamentally strong."
Financial market turmoil is expected to be inevitable following the U.S. credit rating downgrade. The possibility of a downgrade means higher funding costs, which can lead to an increased risk premium on U.S. Treasury securities and raise the U.S.’s capital raising costs.
When S&P Global downgraded the U.S. credit rating in 2011, it also caused massive turmoil in financial markets. David Croy, an analyst at Australia and New Zealand Banking Group, a major Australian bank, said, "Taken at face value, this could damage the reputation and standing of the United States."
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