Fitch lowers US credit rating to AA+; The Ministry of Finance calls it “arbitrary”

Aug 1 (Reuters) – Ratings agency Fitch downgraded the U.S. government’s top credit rating on Tuesday, a move that drew an angry response from the White House and surprised investors, despite the resolution of the debt ceiling crisis two months ago.

Fitch downgraded the US to AA+ from AAA, citing fiscal deterioration over the next three years and repeated talks on fixed debt ceilings that threaten the government’s ability to pay its bills.

Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved and said it intended to complete the review in the third quarter of this year.

With the downgrade, it becomes the second major rating agency after Standard & Poor’s to strip the US of its triple-A rating.

The dollar fell across a range of currencies, stock futures ticked down and government bonds rose after the announcement. But several investors and analysts said they expected the impact of the downgrade to be limited.

Fitch’s move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling deal that lifted the government’s $31.4 trillion borrowing limit, ending months of political brinkmanship.

“In Fitch’s view, there has been a steady deterioration of governance standards over the past 20 years, including tax and debt issues, despite the bipartisan agreement in June to suspend the debt ceiling until January 2025,” the rating agency said in a statement. .

US Treasury Secretary Janet Yellen disagreed with Fitch’s downgrade in a statement, calling it “arbitrary and based on outdated data.”

The White House took a similar stance, saying it “strongly disagrees with this decision”.

“It defies reality to downgrade the United States at a time when President Biden has delivered the strongest recovery of any major economy in the world,” said White House press secretary Karine Jean-Pierre.

REDEEMED DENT

Analysts said the move shows the depth of damage caused to the United States by repeated rounds of contentious debate over the debt ceiling, which pushed the nation to the brink of default in May.

“This basically tells you that US government spending is a problem,” said Steven Ricchiuto, chief US economist at Mizuho Securities USA.

Fitch said repeated political standoffs and last-minute resolutions over the debt ceiling have eroded confidence in fiscal management.

Michael Schulman, chief investment officer at Running Point Capital Advisors said that “the US will generally be seen as strong, but I think that’s a little chink in our armor.”

“It’s a dent to the reputation and standing of the United States,” Schulman said.

Others expressed surprise at the timing, even though Fitch had flagged the possibility.

“I don’t understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved,” said Wendy Edelberg, director of The Hamilton Project At The Brookings Institution in Washington DC

Still, investors saw limited long-term impact.

“I don’t think you’re going to see too many investors, especially those with a long-term investment strategy, saying I have to sell stocks because Fitch took us from AAA to AA+,” said Jason Ware, chief investment officer at Albion Financial Group.

Investors use credit ratings to assess the risk profile of companies and governments when raising financing in the debt capital markets. In general, the lower a borrower’s rating, the higher its financing costs.

“This was unexpected, like it came out of left field,” said Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta. “In terms of the market impact, it’s uncertain right now. The market is at a point where it’s somewhat vulnerable to bad news.”

LIMITED IMPACT

In an earlier debt ceiling crisis in 2011, Standard & Poor’s cut the top “AAA” rating by one notch a few days after a debt ceiling deal, citing political polarization and insufficient steps to fix the country’s fiscal outlook. Its rating is still “AA-plus” – its second highest.

Following this downgrade, US stocks tumbled and the impact of the downgrade was felt across global equity markets, which at the time were already mired in the eurozone financial meltdown. Paradoxically, US Treasuries rose in price due to a flight to quality from equities.

In May, Fitch had put its “AAA” rating on US sovereign debt on hold for a possible downgrade, citing downside risks including political brinkmanship and a growing debt burden.

A May Moody’s Analytics report said a sovereign debt downgrade would set off a cascade of credit implications and downgrades of many other institutions’ debt.

Other analysts had pointed to risks that another downgrade from a major rating agency could affect investment portfolios holding top-rated securities.

However, Raymond James analyst Ed Mills said on Tuesday that he did not expect markets to react significantly to the news.

“My understanding has been that after the S&P downgrade, many of these contracts were reworked to say ‘triple-A’ or ‘government-guaranteed,’ and so the government guarantee is more important than the Fitch rating,” he said.

Others echoed that view.

“Overall, this announcement is much more likely to be rejected than to have a lasting disruptive impact on the US economy and markets,” Mohamed El-Erian, president of Queens’ College, said in a LinkedIn post.

Reporting by Davide Barbuscia in New York, Jyoti Narayan in Bengaluru, Lewis Krauskopf and Saeed Azhar; Editing by Megan Davies, Arun Koyyur, David Gregoiro, Gerry Doyle and Sam Holmes

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