Cody Huelster
In a significant development, Fitch Ratings has downgraded the Long-Term Foreign-Currency Issuer Default Rating (IDR) of the United States from ‘AAA’ to ‘AA+’. The downgrade marks an anticipated fiscal deterioration over the next three years, escalating general government debt, and an erosion in governance standards.
Fitch removed the Negative Rating Watch, instead assigning a Stable Outlook to the nation. The Country Ceiling has been kept constant at ‘AAA’.
The downgrade is a reflection of the ongoing governance degradation and recurrent political standoffs over the last two decades. Despite a recent bipartisan agreement to suspend the debt limit until January 2025, the constant brinkmanship and eleventh-hour resolutions have significantly undermined confidence in fiscal management.
Moreover, the U.S. government does not have a medium-term fiscal framework, unlike most of its peers, and follows a convoluted budgeting process. The culmination of these factors, accompanied by a series of economic shocks, tax cuts, and new spending initiatives, has led to successive debt increases over the previous decade. Furthermore, tackling rising social security and Medicare costs due to an aging population has seen only limited progress.
The general government (GG) deficit is projected to rise to 6.3% of GDP in 2023, up from 3.7% in 2022, due to cyclical downturns in federal revenues, new spending initiatives, and a larger interest burden.
Fitch also forecasts a GG deficit of 6.6% of GDP in 2024 and a widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden, and wider state and local government deficits.
Although the U.S. dollar remains the world’s leading reserve currency, allowing the government considerable financing flexibility, Fitch projects a mild economic recession in 4Q23 and 1Q24. This prediction results from tighter credit conditions, weakening business investment, and a slowdown in consumption.
While several structural strengths underpin the United States’ ratings, the nation faces an impending test. The ongoing challenges of governance and fiscal policy may shape the nation’s financial future and the world economy in profound ways.
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