Aug 2 (Reuters) – Ratings agency Fitch downgraded the U.S. government’s top rating on Tuesday, a move that angered the White House and surprised investors, despite the debt ceiling crisis being resolved there. two months ago.
The immediate response of traders was to launch an offensive towards safe havens. from stocks to government bonds and the dollar.
Fitch lowered the U.S. rating from AA+ to AAA, citing fiscal deterioration over the next three years and repeated debt ceiling negotiations that threaten the government’s ability to pay its bills.
Fitch first reported the possibility of downgrading in May, then maintained this position in June after the debt ceiling crisis was resolved, saying it intended to finalize the review in the third quarter of this year.
With this downgrade, it becomes the second major rating agency after Standard & Poor’s to remove their triple A rating in the United States.
Fitch’s decision comes two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling deal that lifted the government’s $31.4 trillion borrowing limit dollars, thus putting an end to months of brinkmanship.
“In Fitch’s view, there has been a steady deterioration in governance standards over the past 20 years, particularly on fiscal and debt matters, despite the bipartisan agreement in June to suspend the debt ceiling until “in January 2025,” the rating agency said in a statement. .
US Treasury Secretary Janet Yellen at variance with Fitch’s downgrade, in a statement that called it “arbitrary and based on outdated data.”
The White House expressed a similar view, saying it “strongly disagrees with this decision.”
“It defies reality to downgrade the United States at a time when President Biden has achieved the strongest recovery of any major economy in the world,” said White House Press Secretary Karine Jean- Rock.
REPUTATIONAL TOOTH
Analysts said the move shows the extent of the damage done to the United States by repeated rounds of contentious debates over the debt ceiling, which pushed the country to the brink of default in May.
“It basically indicates that U.S. government spending is a problem,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA.
Fitch said repeated political clashes and last-minute resolutions on the debt ceiling have eroded confidence in fiscal management.
Michael Schulman, chief investment officer at Running Point Capital Advisors, said “the United States as a whole will be considered strong, but I think it’s a small chink in our armor.”
“This damages the reputation and position of the United States,” Schulman said.
Others expressed surprise at the timing, even though Fitch had raised the possibility.
United States Capitol Police stand in front of the Capitol building as the Senate votes on debt ceiling legislation to prevent a historic default at the United States Capitol in Washington, United States, on June 1, 2023. REUTERS/Evelyn Hockstein/File Photo Acquire license rights
“I don’t understand how they (Fitch) have worse information now than before the debt ceiling crisis was resolved,” said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution in Washington DC.
U.S. stock futures fell in European trading, suggesting benchmarks could open sharply lower afterward. ,
The yield on the benchmark U.S. Treasury bond fell 2 basis points on the day to 4.03%, while the cost of insuring U.S. sovereign debt against default was largely unchanged on the day, reflecting a sense of calm among investors about the long-term impact of the downgrade.
“I don’t think you’ll see too many investors, especially those with a long-term investment strategy, saying I should sell stocks because Fitch upgraded us from AAA to AA+,” Jason Ware said. , chief investment officer at Albion Financial Group. .
Investors use credit ratings to assess the risk profile of companies and governments when raising financing in debt capital markets. Generally, the lower a borrower’s rating, the higher their financing costs.
“It was unexpected, it kind of came out of left field,” said Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta. “As for the impact on the market, it’s uncertain at the moment. The market is at a point where it’s somewhat vulnerable to bad news.”
LIMITED IMPACT
During a previous debt ceiling crisis in 2011, Standard & Poor’s lowered the maximum “AAA” rating by one notch days after an agreement on the debt ceiling, citing political polarization and insufficient funding. measures taken to improve the country’s fiscal outlook. Its rating remains “AA-plus”, the second highest.
After this downgrade, US stocks fell and the impact of the rating cut was felt in global stock markets, which were reeling from the Eurozone financial crisis.
In May, Fitch placed the ‘AAA’ US sovereign debt rating on review for possible downgrade, citing downside risks including brinkmanship and a growing debt burden.
A May report from Moody’s Analytics said a Treasury debt downgrade would trigger a cascade of credit implications and debt downgrades for many other institutions.
Other analysts have highlighted the risks that a further downgrade by a major rating agency could affect investment portfolios holding higher-rated securities.
Ed Mills, an analyst at Raymond James, said Tuesday, however, that he did not expect markets to react significantly to the news.
“My understanding is that after the S&P downgrade, a lot of these contracts were reworked to say ‘triple-A’ or ‘government-guaranteed,’ and so the government guarantee is more important than the Fitch rating,” he said.
Others echoed this view.
“Overall, this announcement is far more likely to be rejected than to have a lasting disruptive impact on the U.S. economy and markets,” said Mohamed El-Erian, president of Queens’ College, in a message published on LinkedIn.
Additional reporting by Amanda Cooper in London, Jyoti Narayan in Bangalore, Lewis Krauskopf and Saeed Azhar in New York; Editing by Megan Davies, Arun Koyyur and Toby Chopra
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