**Title: Fitch Downgrades U.S. Credit Rating to AA+**
How did the government get to this point?
Fitch’s decision and the government’s current situation.
Fitch has downgraded the United States’ credit rating from AAA to AA+ due to concerns about its rising debt burden and the political challenges faced in addressing spending and tax policies. This decision comes just weeks after the resolution of a standoff between the White House and Congress over raising the government’s borrowing limit. An agreement reached in late May suspended the debt limit for two years and included spending cuts of about $1.5 trillion over the next decade. However, Fitch believes that the expected fiscal deterioration over the next three years, high government debt, and erosion of governance make this downgrade necessary.
The government’s reaction and expert opinions
The Biden administration has reacted angrily to Fitch’s decision, with Treasury Secretary Janet Yellen stating that the assessment is flawed and fails to consider the improvements in governance observed over the past two and a half years. However, Douglas Holtz-Eakin, President of the American Action Forum, supports Fitch’s downgrade, citing the long-standing budget deficit and the lack of efforts to address it in Washington. Standard & Poor’s previously removed the U.S.’s triple-A rating in 2011 following a similar standoff over the borrowing limit.
What happens when debt is downgraded?
Understanding the implications of a credit rating downgrade.
When an issuer of debt undergoes a credit rating downgrade, it usually results in higher interest rates to compensate for the increased risk of default. This means that the U.S. government may have to pay higher interest rates on its future bonds, which could impact taxpayers and increase interest costs for the government. Many pension funds and investment vehicles are required to hold only high-rated investments, so a credit rating decline could force them to sell bonds issued by the downgraded government, potentially leading to higher interest rates.
Will U.S. borrowing costs rise?
Potential impacts on U.S. borrowing costs.
Despite the downgrade, economists believe that Fitch’s rating change will have little impact. This is because few pension funds are limited to holding only triple-A rated debt. Therefore, the current AA+ rating from Fitch and Standard & Poor’s should be sufficient to maintain demand for U.S. Treasury securities. Large banks required by regulators to hold Treasurys will not face any rule changes directly due to the downgrade. The U.S. government bond market is the largest globally, making it easy for investors to buy and sell Treasurys as needed. Treasury securities are considered highly secure due to the U.S.’s stable economy and political system.
Fitch’s rationale behind “governance”
Understanding Fitch’s reference to governance.
Fitch cited a decline in governance as a key reason for the downgrade. This refers to the repeated political battles and government shutdowns that have occurred in Washington over the past two decades, negatively impacting fiscal management. Fitch also highlighted the inability of compromise legislation to effectively address the long-term drivers of government debt, specifically mentioning entitlement programs such as Social Security and Medicaid. Limited progress has been made in tackling rising costs due to an aging population.
Fitch’s decision to downgrade the U.S. credit rating reflects concerns over the government’s rising debt burden and challenges in addressing spending and tax policies. While it may have little immediate impact on financial markets or borrowing costs, the downgrade raises concerns about the country’s governance and its ability to address long-term fiscal challenges. However, economists believe that the current AA+ rating from Fitch and Standard & Poor’s should be sufficient to maintain demand for U.S. Treasury securities.