The White House has slammed the decision by Fitch to downgrade America’s perfect credit rating, saying the move ‘defies reality’.
The agency cut the US from its pristine AAA rating by one level to AA+ on Tuesday. Factors included the nation’s growing debt burden, expected fiscal deterioration over the next three years and “the erosion of governance”.
“These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade,” Fitch said.
But the timing of the decision was questioned, after recent data showed a resilient economy. Government reports have shown continued disinflation while GDP growth blew past expectations in the second quarter of this year.
That data has led to economists showing a sunnier disposition towards the economy, evidenced by new forecasts that the US is on track to avoid a recession.
“It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” White House Press Secretary Karine Jean-Pierre said.
The White House said Fitch’s decision was based on data from before President Joe Biden took office.
“Many of these measures, including those related to governance, have shown improvement over the course of this dministration, with the passage of bipartisan legislation to address the debt limit, invest in infrastructure, and make other investments in America’s competitiveness,” Treasury Secretary Janet Yellen said in a statement.
“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset, and that the American economy is fundamentally strong.”
Investors use credit ratings as a benchmark for judging how risky it is to lend money to a government.
US Treasury yields changed little on Wednesday as traders weighed the decision by Fitch.
The US was put on negative credit watch by Fitch earlier this year over a debt ceiling standoff between the White House and Republican leadership.
A last-minute deal was struck to avert an economic catastrophe, but the credit agency remained wary of political divides.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said.
Fitch also projects the US debt burden to balloon to 118.4 per cent of GDP by 2025. The average ‘AAA’ median is 39.3 per cent of GDP.
As the debt-to-GDP ratio rises, so too will the vulnerability of the US to future economic shocks, according to the rating agency.
Fitch’s downgrade comes 11 years after S&P had downgraded US’s perfect rating.
Updated: August 02, 2023, 2:48 PM
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