The rating downgrade is similar to a move made more than a decade ago by S&P Global Ratings. Getty Images
The rating downgrade is similar to a move made more than a decade ago by S&P Global Ratings. Getty Images
The rating downgrade is similar to a move made more than a decade ago by S&P Global Ratings. Getty Images
The rating downgrade is similar to a move made more than a decade ago by S&P Global Ratings. Getty Images

Fitch downgrades US credit rating from AAA to AA+ as country’s fiscal deficits swell


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The US was stripped of its top-tier sovereign credit grade by Fitch Ratings, which criticised 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 agency cut the US one level from AAA to AA+, echoing a move made more than a decade ago by S&P Global Ratings.

Tax cuts and new spending initiatives coupled with multiple economic shocks have swelled budget deficits, Fitch said, while medium-term challenges related to rising entitlement costs remain largely unaddressed.

“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.

Treasury Secretary Janet Yellen quickly responded to the downgrade, calling it “arbitrary” and “outdated.”

Treasuries edged higher in early Asia trading after the Fitch announcement on modest demand for haven assets.

“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset, and that the American economy is fundamentally strong,” Ms Yellen said.

Fitch had said that it was weighing a cut to the country’s credit grade in May, when Democrat and Republican politicians were at odds over raising the borrowing limit and the US Treasury was weeks away from running out of cash.

While that crisis was averted, Fitch nonetheless said that the repeated debt-limit clashes and 11th-hour resolutions have eroded confidence in the US's fiscal management.

Tuesday’s statement also attributed the downgrade to the country’s rapidly swelling debt burden, which it forecasts to reach 118 per cent of gross domestic product by 2025, more than two-and-a-half times higher than the AAA median of 39.3 per cent.

The rating agency projects the debt-to-GDP ratio to rise even further in the longer-term, increasing America’s vulnerability to economic shocks, the report said.

Several economic commentators were surprised by the news.

Mohamed El Erian, the chief economic adviser at Allianz and a Bloomberg Opinion columnist, said on social media he was puzzled by “many aspects” of the announcement, including the timing.

“The United States faces serious long-run fiscal challenges,” said former Treasury Secretary Larry Summers in a social media posting.

“But the decision of a credit-rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept.”

Treasuries react

Yields on two-year Treasuries fell one basis point to 4.89 per cent in Asia trading, while those on 10-year US bonds were little changed around 4.02 per cent. The dollar dipped against the euro and yen.

S&P’s downgrade of the US credit rating in 2011 triggered a sell-off in risk assets like equities around the world, but ironically boosted Treasuries as investors sought havens.

“I suspect the market will be in two minds about it – at face value, it’s a black mark against the US’s reputation and standing, but equally, if it fuels market nervousness and a risk-off move, it could easily see safe haven buying of US Treasuries and the dollar,” said David Croy, strategist at Australia & New Zealand Banking Group in Wellington.

“It’s finely balanced.”

The yield on 30-year US debt rose to the highest in almost nine months on Tuesday as the Treasury Department prepared to ramp up issuance of longer-dated securities to fund its widening budget deficit.

Washington responds

The move by Fitch now gives the US two AA+ ratings. That could raise a problem for funds or index trackers with a AAA only mandate, opening up the possibility of forced sales for compliance reasons.

Moody’s Investors Service still rates the US sovereign Aaa, its top grade.

Democrats in Congress seized on the downgrade to blame Republicans for holding up the US debt ceiling increase earlier this year.

“This is the result of Republicans’ manufactured default crisis. They’ve repeatedly put the full faith and credit of our nation on the line, and now, they are responsible for the second downgrade in our credit rating,” Democrats on the ways and means committee said in a statement.

House Republican campaign spokesman Jack Pandol said on X, formerly Twitter, that the cause of downgrade was “Bidenomics”.

Iran's dirty tricks to dodge sanctions

There’s increased scrutiny on the tricks being used to keep commodities flowing to and from blacklisted countries. Here’s a description of how some work.

1 Going Dark

A common method to transport Iranian oil with stealth is to turn off the Automatic Identification System, an electronic device that pinpoints a ship’s location. Known as going dark, a vessel flicks the switch before berthing and typically reappears days later, masking the location of its load or discharge port.

2. Ship-to-Ship Transfers

A first vessel will take its clandestine cargo away from the country in question before transferring it to a waiting ship, all of this happening out of sight. The vessels will then sail in different directions. For about a third of Iranian exports, more than one tanker typically handles a load before it’s delivered to its final destination, analysts say.

3. Fake Destinations

Signaling the wrong destination to load or unload is another technique. Ships that intend to take cargo from Iran may indicate their loading ports in sanction-free places like Iraq. Ships can keep changing their destinations and end up not berthing at any of them.

4. Rebranded Barrels

Iranian barrels can also be rebranded as oil from a nation free from sanctions such as Iraq. The countries share fields along their border and the crude has similar characteristics. Oil from these deposits can be trucked out to another port and documents forged to hide Iran as the origin.

* Bloomberg

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The most expensive investment mistake you will ever make

When is the best time to start saving in a pension? The answer is simple – at the earliest possible moment. The first pound, euro, dollar or dirham you invest is the most valuable, as it has so much longer to grow in value. If you start in your twenties, it could be invested for 40 years or more, which means you have decades for compound interest to work its magic.

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This table shows how much you would have in your pension at age 65, depending on when you start and how much you pay in (it assumes your investments grow 7 per cent a year after charges and you have no other savings).

Age

$250 a month

$500 a month

$1,000 a month

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$1,281,657

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$606,439

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$263,191

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Date of launch: 2014

Founder: Jon Richards, founder and chief executive; Samer Chebab, co-founder and chief operating officer, and Jonathan Rawlings, co-founder and chief financial officer

Based: Media City, Dubai 

Sector: Financial services

Size: 120 employees

Investors: 2014: $500,000 in a seed round led by Mulverhill Associates; 2015: $3m in Series A funding led by STC Ventures (managed by Iris Capital), Wamda and Dubai Silicon Oasis Authority; 2019: $8m in Series B funding with the same investors as Series A along with Precinct Partners, Saned and Argo Ventures (the VC arm of multinational insurer Argo Group)

Updated: August 02, 2023, 4:47 AM