In light of the US Treasury Department’s alarming announcement of impending borrowings, Fitch Ratings has downgraded the long-term credit rating of the US from ‘AAA’ to ‘AA+.’ Citing reasons such as fiscal deterioration, increasing government debt, and governance erosion over two decades, Fitch assigned a stable outlook to cancel out the previously given negative outlook. This downgrade by Fitch marks its position as the second major US rating agency to downgrade US credit ratings, which has sparked widespread economic discourse.
Key Points
1. Fitch Ratings has downgraded the United States’ long-term credit rating from ‘AAA’ to ‘AA+,’ making it the second major U.S. rating agency to do so. The downgrade comes as a result of increasing government debt and deficits, erosion of governance, and successive debt increases over the last ten years.
2. Fitch expects the general government deficit to increase to 6.3% of GDP this year, up from 3.7% in 2022. Additionally, government debt is expected to rise, with the debt-to-GDP ratio projected to reach 118.4% by 2025, significantly higher than both the ‘AAA’ and ‘AA’ medians.
3. Despite the downgrade, Fitch acknowledges that the U.S. still has several strengths, including a large, diverse, and advanced economy and the dollar is the world’s leading reserve currency. However, the agency projects a U.S. recession in the last quarter of this year and the first quarter of next year.
Fitch Ratings Downgrades U.S. Credit Rating to ‘AA+’
In a bold move, Fitch Ratings has become the second major US rating agency to downgrade the US from ‘AAA’ to ‘AA+.’ This comes after the Treasury Department’s stunning announcement that in addition to the whopping $32.6 trillion debt the US government already owes, it’ll need to borrow another $1 trillion this quarter and $852 billion next quarter. Wouldn’t we all like to borrow like that?
The downgrade was perhaps not entirely unexpected. After all, Fitch had the US on a negative outlook, suggesting a downgrade was on the cards. With this move, the negative outlook has been replaced by a stable outlook, but the question is, what does this mean for us, especially for investors?
Well, let’s delve a little deeper into Fitch’s reasoning for the downgrade.
Government’s Fiscal Deterioration, A Concern
Fitch voiced concerns about the expected fiscal deterioration over the next three years, the high and growing government debt burden, and the weakening of the US governance standards over the last two decades.
Debt limit standoffs, last-minute resolutions, and a complex budgeting process have all contributed to this image of shaky fiscal management. This looks anything but reassuring, doesn’t it?
Fitch also painted a gloomy picture of the expected deficit, a cool 6.3% of GDP this year from 3.7% last year, which is expected to reach 6.9% by 2025. On top of all this, a higher debt-to-GDP ratio isn’t helping matters. These numbers are pretty intimidating, aren’t they?
And, What About the Positives?
Despite these concerns, the US has some aces up its sleeve for a recovering economy, per Fitch. Our robust, well-diversified economy, underpinned by a high-income populace and a dynamic business environment, are some of our strengths. And, of course, the power of the Dollar as the world’s pre-eminent reserve currency cannot be underestimated.
Implications for Investors
But here’s the million-dollar question: What does this all mean for you, for me, for anyone with a stake in the US economy, particularly investors?
In short, these credit downgrades should theoretically make it more expensive for governments to borrow. But that’s not always the case. Look at Japan, one rung down the rating ladder from the US, offered the world’s lowest yield rates thanks to its central bank’s policy, not due to its credit rating. Interesting paradox, isn’t it?
The Real Scoop for Investors
For investors, this downgrade might not be as menacing as it seems. Market dynamics often overshadow these downgrades. 2011 when S&P downgraded the US, the Treasury yields continued to dwindle to record lows until August 2020.
Investors might want to keep these dynamics in mind while devising their strategy. For instance, betting on yield-driven investments like bonds might prove lucrative if history repeats itself. However, while historical data can guide us, it doesn’t guarantee future results.
In times of uncertainty, being well-informed and understanding the complexities of the market becomes even more critical. So, keep checking back here for more insights and the latest news.
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