In the Face of Criticism, Fitch Vouches for U.S. Credit Rating Downgrade

**Title: Fitch Defends Controversial US Credit Rating Downgrade as Debt Levels Soar**

**Subtitle: The reasons behind Fitch’s decision to downgrade the US credit rating**

The United States’ recent credit rating downgrade by Fitch has sparked controversy and debate. Fitch’s co-head of Americas sovereign ratings, Richard Francis, defended the move, highlighting the concerning increase in US debt levels. With US debt as a share of GDP reaching 113% from below 60% in 2007, Fitch believes the country can no longer be considered the gold standard for creditworthiness. This article analyzes the reasons behind Fitch’s controversial decision and the subsequent pushback from the Biden administration.

**US Debt Levels and Deteriorating Government Balance Sheet**

Fitch’s decision to downgrade the US credit rating was primarily driven by the accelerated deterioration of the US government’s balance sheet. Richard Francis explained that while debt to GDP ratio peaked at 120% during the pandemic, it has started rising again and is projected to continue doing so in the medium term. This trend, combined with rising interest burdens and a lack of concerted political action, has undermined the country’s creditworthiness. Fitch’s downgrade from AAA to AA+ reflects their belief that the US can no longer secure the highest credit rating.

**The Impact of Economic Performance**

Fitch’s downgrade of the US credit rating is not swayed by arguments that the economy has outperformed economists’ expectations. Despite the positive economic performance, Fitch predicts a recession starting in the fourth quarter. Even a soft landing would not be enough to offset the ongoing fiscal and governance decline. According to Richard Francis, this economic performance does not significantly influence Fitch’s analysis.

**USD’s Global Reserve Currency Status**

Fitch’s decision to downgrade the US credit rating was delayed due to the dollar’s coveted global reserve currency status. The dollar’s status allows the US to borrow cheaply from foreign investors, giving it a strategic advantage over other AAA-rated countries like Germany. However, Francis highlighted that some of the US government’s financial metrics had already dropped below even double-AA rating. This implies that a downgrade would have occurred earlier if not for the dollar’s reserve currency status.

**Pushback from the Biden Administration**

Unsurprisingly, the Biden administration disagreed with Fitch’s assessment and criticized the decision to question their management of the country’s finances. Treasury Secretary Janet Yellen called the downgrade “arbitrary” and “unwarranted.” This disagreement extended beyond the administration, as even independent economists like Mohammed El-Erian questioned Fitch’s move. Concerns were raised that the downgrade could worsen existing political divides and potentially be exploited by rogue states like Russia.

**Lack of Meaningful Progress on Entitlement Reform**

One of the critical factors that factored into Fitch’s decision was the increasing failure of politicians to address pressing fiscal reforms, particularly around entitlement programs like social security and Medicare. The existence of the debt ceiling was also seen as incompatible with governance at other AAA-rated countries. Francis expressed disappointment in both Republicans and Democrats for their inability to come up with long-term solutions to address the growing fiscal issues.

**The International and Domestic Implications**

Internationally, the downgrade plays into the hands of adversaries like Russia, who are aiming to weaken the hegemonic status of the dollar. Adversaries will likely use the downgrade as evidence of the US’s diminishing power and influence. Domestically, the downgrade could further fuel polarized conversations, exacerbating the already divided political landscape. Fitch’s decision to downgrade the US credit rating is not unprecedented, with Moody’s being the only rating agency that still believes the US should retain its AAA rating.

**The Credibility of Credit Rating Agencies**

Credit rating agencies, including Fitch, have faced criticism and skepticism since their failure to predict the global financial crisis. Their reputation was tarnished when they rated high-risk debt as investment grade, leading to the 2008 financial crisis. Francis acknowledged this skepticism but emphasized that Fitch’s downgrade should not be perceived as a major blow since AA+ is the second-highest rating. He clarified that Fitch’s decision was based on the incompatibility of the US’s fiscal story and governance with the triple-A rating.

In conclusion, Fitch’s decision to downgrade the US credit rating has been met with controversy and disagreement. The concerning increase in US debt levels, combined with issues of fiscal governance and political polarization, led Fitch to conclude that the US can no longer maintain its status as the gold standard for creditworthiness. The impact of the downgrade, both domestically and internationally, remains to be seen.

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