Following the notable downgrade of the USA by S&P on August 5, 2011, a significant event has occurred as Fitch downgraded the US credit rating due to concerns over fiscal deterioration, mounting debt burden, and governance issues spanning the last two decades. This latest downgrade is expected to have a profound impact, similar to the previous one, as two out of three US credit rating agencies now rate the US as sub-AAA.
During the previous episode, global stock markets experienced a decline shortly after the announcement, with major US stock indexes seeing drops of between five and seven percent in a single day. Surprisingly, despite the downgrade affecting US treasury bonds, their prices rose, and the US dollar strengthened against other major currencies, indicating a shift toward safe-haven assets amid concerns about the European debt crisis.
Fitch’s decision to downgrade the US credit rating was unexpected, driven by fiscal challenges, governance issues, and the absence of a medium-term fiscal framework. Projections indicate an increase in the government deficit and a continuous rise in the debt-to-GDP ratio, making the US fiscal position vulnerable to potential economic shocks.
Despite the challenges, the US economy’s strength, diversity, and the US dollar’s reserve currency status support the country’s ratings, providing the government with exceptional financing flexibility. However, Fitch predicts a mild recession in the US during late 2023 and early 2024, accompanied by slow real GDP growth and challenges in achieving the inflation target set by the Federal Reserve.
The recent Fitch downgrade holds significance, occurring nearly 12 years after Standard & Poor’s downgraded the US to AA+. The announcement was made on a Friday afternoon, allowing the market an entire weekend to react. However, the extended time did little to ease concerns, as the S&P 500 experienced a sharp decline, ending the day on a low note. Investors and market participants are closely monitoring the situation and its potential implications on global financial markets.
