Recently in news
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.
COMMENTS