Fitch Ratings has stripped the US of its AAA sovereign credit grade, citing the country's ballooning fiscal deficits and an erosion of governance that has led to repeated debt limit clashes over the past two decades. The credit rating of the US now stands at AA+ from previous AAA. It’s the second time that the US has encountered credit rating, back in August of 2011, the Standard & Poor (S&P) stripped the US of its AAA rating to AA, but later, as the recession averted, it notched up the rating to AA+.
As per the statement by Fitch, "The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance".
The downgrade can raise a problem for the regulated investment industry or index trackers, which only mandate investment in AAA-rated securities, which can further open up the possibility of forced sales of assets over compliance reasons.
Treasury Secretary Janet Yellen strongly criticized the action and responded to the downgrade by calling it "arbitrary" and "based on outdated data." She further said that Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset and that the American economy is fundamentally strong.
There have been many incidents in the past, according to stories published in the media. Back on May 24 of the current year, Fitch warned the Biden government that it was weighing cutting the nation's credit rating as Congress again struggled to raise the borrowing limit. Back then, Treasury was on the verge of defaulting on its debt obligations, and the two political parties—Democrats and Republicans—were trying to rest on a done deal to raise the nation's borrowing limit. The debt crisis was eventually resolved as it has been in the past, with a cut of about $1.5 trillion from the government deficit over the next decade, but the Fitch nonetheless said that the repeated debt-limit clashes and last-minute deal have eroded confidence in the nation's fiscal management.
Fitch issued a research last year that indicated government stability fell from 2018 to 2021 but rose once Biden took charge of the presidency. Another element in Fitch's judgement is that it expects the US economy to plunge into a "mild recession" in the final three months of this year and early next year. Economists at the Federal Reserve issued a similar estimate this spring but then reversed it in July and predicted GDP would slow but a recession would likely be averted.