Fitch Ratings, one of the largest credit rating agencies in the United States, has raised concerns about the country’s ability to repay its debt and placed its “AAA” credit rating on negative watch. Despite Congress agreeing to suspend the debt limit until 2025, Fitch remains cautious, highlighting a steady deterioration in governance and political polarization over the past 15 years. The agency cites repeated political standoffs and last-minute suspensions as factors that lower confidence in governance on fiscal and debt matters. While Fitch acknowledges the exceptional strengths of the US economy, it warns that these strengths could be eroded over time due to governance shortcomings.
Congress reaches debt limit agreement, but Fitch maintains negative watch
After months of debate between Democrats and Republicans, the US Senate recently passed bipartisan legislation to lift the government’s $31.4 trillion debt ceiling. However, Fitch Ratings maintains its negative watch on the country’s “AAA” credit rating, despite acknowledging the positive aspects of the agreement, such as reducing fiscal deficits modestly over the next two years. The agency emphasizes the need for coherence and credibility in policymaking and medium-term fiscal and debt trajectories, which will play a key role in its assessment. Fitch intends to resolve the review by the third quarter of this year.
Fitch Ratings highlights the “steady deterioration” in governance over the past 15 years as a major factor contributing to its negative watch on the US credit rating. Increased political polarization, contested elections, brinkmanship over the debt limit, and failure to address fiscal challenges have led to rising fiscal deficits and debt burdens. The agency emphasizes the importance of confidence in governance on fiscal and debt matters, expressing reservations about the repeated political standoffs surrounding the debt limit. While the US economy possesses exceptional strengths, including its size and GDP per capita, Fitch warns that governance shortcomings could undermine these strengths.
Implications of a credit rating downgrade
A potential credit rating downgrade for the United States could have significant implications. It would make borrowing debt more expensive for the country and divert funds from other priorities. Fitch’s decision to maintain a negative watch reflects concerns about the lack of structural changes in how the US government deals with its borrowing limit. Even though a default was narrowly avoided, the rating agencies’ previous downgrade of the US in 2011 serves as a reminder that a downgrade is possible if structural changes are not implemented. The potential erosion of the US dollar’s dominance as a reserve currency has also been raised due to the debt crisis, although opinions on this matter differ among experts.
As Fitch Ratings maintains its negative watch on the US credit rating, concerns linger about the country’s governance and ability to address its fiscal challenges. The recent debt limit agreement provides temporary relief, but the need for long-term solutions remains paramount to restore confidence and secure the nation’s financial stability.