Following through on a warning issued in May, Fitch Ratings, one of the nation’s “Big Three” credit reporting agencies, issued a credit downgrade to the U.S. government on Tuesday, citing numerous contributing factors including an ongoing series of 11th hour compromises over partisan divides on federal debt ceiling policy.
On Tuesday, Fitch issued a statement outlining the rationale for demoting the U.S. long-term rating from the top tier “AAA” to “AA+,” which is one step down.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions,” the statement read.
Fitch also called out what it described as an erosion of government function and declining public confidence in the handling of federal fiscal issues.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” Fitch analysts wrote in a press release. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
U.S. Treasury Secretary Janet Yellen decried the decision in her own statement on Tuesday, accusing Fitch of basing the downgrade decision on outdated data and arguing that numerous fiscal policy improvements have been made under the leadership of her boss, President Joe Biden.
“I strongly disagree with Fitch Ratings’ decision,” Yellen wrote. “The change by Fitch Ratings announced today is arbitrary and based on outdated data.
“Fitch’s quantitative ratings model declined markedly between 2018 and 2020 — and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision. Many of these measures, including those related to governance, have shown improvement over the course of this Administration, with the passage of bipartisan legislation to address the debt limit, invest in infrastructure, and make other investments in America’s competitiveness.”
It is only the second time in history that the U.S. government credit rating has been given a downgrade, with the last instance in 2011 when Standard & Poor’s issued a downgrade amid partisan turbulence over government borrowing and debt limits.
Credit downgrades typically make borrowing money more expensive. In a 2012 report, the Government Accountability Office estimated that the 2011 budget standoff raised the Treasury’s borrowing costs by $1.3 billion that year.
While the 2011 credit downgrade incited losses in domestic and international markets, most economists predict the Fitch rating adjustment will be less impactful.
“Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the U.S. economy and markets,” Mohamed El-Erian, president at Queens’ College, said in a LinkedIn post, per a Reuters report.