Fitch has joined its rival, S&P Global, in cutting the credit rating of the United States. In a statement issued on Tuesday after Wall Street trading ended for the day, Fitch revealed that the new rating would be AA+, down from AAA. This mirrors S&P's rating, which has been in place since 2011. The news caused US share futures to turn lower.
Fitch cited "expected fiscal deterioration over the next three years," erosion of governance, and a growing general debt burden as the reasons for the downgrade. The agency also highlighted the repeated debt-limit political standoffs and last-minute resolutions, which have eroded confidence in fiscal management.
The US had previously avoided a credit crunch resulting from the contentious debt limit legislation. S&P's downgrade had also emphasised increased political risk as a significant factor. Fitch echoed a similar sentiment, mentioning the recent debt limit feud as a reason for its Tuesday's downgrade.
Despite the bipartisan agreement in June to suspend the debt limit until January 2025, Fitch expressed concern over a steady deterioration in standards of governance over the last two decades, particularly in fiscal and debt matters.
Additionally, Fitch raised concerns about the rising general government deficit, anticipated to reach 6.3% of gross domestic product (GDP) in 2023, up from 3.7% in 2022. Even though the Fiscal Responsibility Act includes cuts to non-defence discretionary spending, Fitch believes it offers only a modest improvement to the medium-term fiscal outlook.
The agency further cautioned about potential economic challenges, including tightening credit conditions, weakening business investment, and a possible "mild" recession in the fourth quarter of 2023 and the first quarter of next year.
However, the Biden White House expressed disagreement with Fitch's downgrade, emphasising the strong recovery of the US economy under President Biden's leadership.
In contrast to the US, all three major rating agencies maintain Australia's credit rating at the highest level, AAA stable. Moody's is the only major rating agency that still assigns the US a AAA rating.
