The US has seen its credit rating downgraded from AAA to AA+ by Fitch, citing "repeated debt limit standoffs" that threatened to result in the country defaulting on its debt.
In a statement yesterday (1 August), Fitch pointed to the "expected fiscal deterioration over the next three years" in the country, as well as the "steady deterioration in standards of governance"
In May, Congress reached a conclusion to their debate over the debt ceiling, with a deal being reached after months of negotiations and threats that the US may default on its debt.
Congress must vote to raise the amount it can borrow to pay for spending it has already committed to, also known as the debt ceiling, with the next deadline set for January 2025.
Brinkmanship over debt ceiling negotiations and "last-minute resolutions" had increased in recent years Fitch said, which has "eroded confidence in fiscal management".
The most recent fight over the debt ceiling saw some Republicans in Congress suggest that the US should default on its debt rather than continue to increase, an idea that worried markets.
"These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade," said the ratings agency.
"Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population."
Government deficit is expected to increase in the US, rising to 6.3% of GDP this year compared to 3.7% of GDP in 2022. Furthermore, state and local government deficits will jump from a 0.2% of GDP surplus last year to a 0.6% deficit.
As interest rates rises, debt will be harder to pay off, with Fitch noting that the interest-to-revenue ratio is expected to reach 10% by 2025, compared to 2.8% for the AA median and 1% for the AAA median.
Therefore, the rating agency's proprietary Sovereign Rating Model calculated the US should receive a score of AA+ on its Long-Term Foreign-Currency IDR scale.
However, Fitch did still note that the US has "exceptional strengths" due to being the world's largest economy and owning the "world's preeminent reserve currency".
Fellow ratings agency Moody's retains an AAA rating for the country, while S&P also reduced the US to AA+ in 2011 due to similar debt ceiling negotiations.
"Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the US economy into a mild recession in 4Q23 and 1Q24, according to Fitch projections," it added.
It forecasted the country will see real GDP growth slow to 1.2% this year and just 0.5% in 2024, as the labour force participation rate remains lower than pre-pandemic levels.
US Treasury secretary Janet Yellen described the decision as "arbitrary and based on outdated data".
"Fitch's quantitative ratings model declined markedly between 2018 and 2020, and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision," she said.
