Global Credit Rating Agency Fitch has downgraded US sovereign rating from ‘AAA’ to ‘AA+’, citing fiscal deterioration over the next three years, a high and growing general government debt burden and steady deterioration in governance over the last 20 years, as major reasons behind it.
“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 relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” Fitch said in a statement.
Also read: Fitch Cuts US Credit Rating, Warns Of US Economy Slipping Into Mild Recession
The White House and US Treasury, as expected, gave a critical reply to the downgrade by Fitch. “We strongly disagree with this decision. The ratings model used by Fitch declined under President Trump and then improved under President Biden, and it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” White House Press Secretary Karine Jean-Pierre said in a statement.
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What does downgrade mean for the US?
The downgrade rating for the US reflects fiscal deterioration which was expected and a high growing general government debt burden. Fitch said that the repeated debt-limit political standoffs and last-minute resolutions have eroded the confidence in fiscal management.
In addition, the government lacks a medium-term fiscal framework, unlike most peers and also has a complex budgeting process.
The statement by Fitch also attributed the downgrade to the country’s rapidly swelling debt burden, which it forecasts to reach 118% of gross domestic product by 2025, more than two-and-a-half times higher than the ‘AAA’ median of 39.3%.
"These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an ageing population," Fitch observed.
Well, this is not the first downgrade in ratings for the United States. In 2011, Standard & Poor’s (S&P) downgraded the US rating from ‘AAA’ to ‘AA+’, saying the budget deal brokered in Washington didn’t do enough to address the gloomy outlook for US finances.
S&P downgraded US debt after the 2011 debt ceiling deal, primarily viewing the deal as insufficient in stabilising longer term US debt stability, according to media reports. S&P has not changed its US rating since then.
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Impact on Asian Markets
The Indian equity market saw a bloodbath on Wednesday, with Sensex fell below to 66,000 level, while the Nifty declined over 300 points during the day, on weak global cues.
However, analysts believe that the US rating by Fitch may not have a major impact on the Indian market.
“The recent downgrade of the US rating by Fitch may have a minor impact on the Indian market, but it is unlikely to be a major concern since rating changes often come with certain repercussions. Nevertheless, it could provide an opportunity for some investors to take profits, leading to a possible pullback in the market. Signs of exhaustion are evident at higher market levels, following a strong rally from the lows in March. Foreign Institutional Investors (FIIs) have turned net sellers in the past few days, indicating a cautious stance in the market,” Santosh Meena, Head of Research, Swastika Investmart Ltd, told Jagran English.
Hemang Jani, an independent market expert, was quoted as saying by The Economic Times, “ If you see some negative data points on the global markets or some sort of a correction somewhere, I do not think we should really bother too much. If you look at the earnings season so far, it has been progressing reasonably well.”
On the other hand, other Asian countries' markets also witnessed a setback on Wednesday. Hong Kong, Tokyo, Australia, Korean and other Asian markets fell by up to 2 per cent following the downgrade by Fitch. Stocks of tech firms which depend on the US and western markets for business were impacted the most, according to reports.
“However, we believe that the impact should be short-lived as one rating agency S&P has already downgraded the US to AA+ beforehand. This time the impact should be for a couple of days and the market may focus on other fundamental factors. The impact on the Indian market should also be short-lived and other factors such as earnings, crude prices and RBI policy and fund flows will be the key to the market. Having said that the market is heated the world over and may find a reason to correct it,” Mukesh Kochar, National Head-Wealth, AUM Capital, was quoted as saying by Indian Express.