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Fitch’s downgrade of U.S. UPSC NOTE

 


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  • Fitch Ratings Inc. is an American credit rating agency and is one of the Big Three credit rating agencies.

  • Rating agency Fitch downgraded the United States of America’s (U.S.A.) rating to ‘AA+’ from ‘AAA’ — a rating that it had been holding at the agency since 1994. 

  • This was the first major downgrade for the country since Standard & Poor’s (S&P) actions in 2011. 

What exactly is the downgrade?

  • Rating agencies are institutions that assess the creditworthiness or financial capability of a region, country, its institutions or individual organisations. 

  • They assess its ability to meet future payment obligations — particularly important for those making investment decisions.

  • Fitch rates credit quality from ‘AAA’ (its highest rating) to ‘D’ (lowest rating). 

  • ‘AAA’ is assigned to entities with “exceptionally strong capacity for payment of financial commitments”. 

  • The downgrade in discussion, that is ‘AA’, denotes “very low default risk”, in other words, “very strong capacity for payment of financial commitments”. 

  • Important to note, both reflect strong profiles — varying only on a comparative basis.

Why has Fitch downgraded the U.S. credit ratings?

  • Fitch held that there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters. 

  • This is despite the bipartisan agreement reached in June for suspending the debt limit until January 2025. 

  • The agency observed that the “repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

  • The second of the observations relates to lacking a medium-term fiscal framework, unlike most peers, and having a complex budgeting process.

  • The agency noted that these, combined with several economic shocks, tax cuts and new spending initiatives has led to successive increases in debt over the last decade.

  • Increasing national debt and rising interest rates result in interest costs to rise. 

  • Other than restricting the scope for investment in priority areas, it creates a potentially unwanted cycle of further borrowing, servicing interest and expanding debt. 

  • Furthermore, this is taking place in the backdrop of the tax reforms of 2017 set to expire in 2025.

Impact of the downgrade on the U.S. economy

  • Fitch projected that tighter credit conditions, weakening business investment and a slowdown in consumption would push the U.S. economy into mild recession in Q4 of this year and Q1 of next year. 

  • It also sees U.S. annual real GDP growth slowing to 1.2% this year from 2.1% in 2022.

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Fitch’s downgrade of U.S. UPSC NOTE
Fitch’s downgrade of U.S. UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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