Economy AA+ instead of AAA
‘Poor standards of governance’ – Fitch strips US of top credit rating
Status: 02.08.2023 | Reading time: 2 minutes
“Political process increasingly fragile, debt ever greater”
The rating agency Fitch downgraded the top credit rating of the United States. Their top ranking of AAA has now been lowered to AA+. Dietmar Deffner talks to LBBW Chief Economist Dr. Moritz Kraemer.
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Rating agency Fitch downgraded the US to AA+. The background to this decision is also the unstable political situation in the country, with unpredictable fighting between Democrats and Republicans. Treasury Secretary Janet Yellen criticized the new classification.
The rating agency Fitch has withdrawn the coveted top credit rating from the United States. The rating was lowered by one step from AAA to AA+, as Fitch announced on Tuesday. Fitch is catching up with its competitor S&P, which had already lowered the US rating to AA+ in 2011. The third agency, Moody’s, maintains the highest rating, AAA.
The rating agency cited deepening political disagreements over spending and tax policies as a key reason for its decision. Fitch said US governance had deteriorated relative to other highly rated countries, citing “repeated debt ceiling deadlocks and last-minute fixes.”
The air is getting a little thinner for the American government on the debt market. Because conservative investors like to avoid paper that doesn’t have the best rating. All the more so, the more of the big agencies do not award it.
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According to those in the know, Fitch has informed the Biden administration that the Jan. 6, 2021 attack on the US Capitol was also a factor in the downgrade because it indicated an unstable government. Fitch also assumes that the US economy will slide into a “mild recession” in the last three months of this year and early next year.
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Federal Reserve economists issued a similar forecast in the spring but revised it in July, predicting that while growth is slowing, a recession is likely to be avoided.
The deficit is likely to increase to 6.3 percent of economic output (GDP) this year, 6.6 percent next year and further increase to 6.9 percent in 2025.
Finance Minister Yellen considers gradation to be arbitrary
Treasury Secretary Janet Yellen strongly criticized the downgrade. The move is arbitrary and based on outdated data, she explained. Yellen pointed out that the US economy has recovered quickly from the pandemic recession, the unemployment rate is nearing a century low and the economy grew at a solid annual rate of 2.4 percent in the April-June quarter.
In justifying the decision, Fitch referred, among other things, to the high level of debt in the United States and the repeated struggles between Republicans and Democrats in Congress over the budget. Tax cuts and higher-spending investment programs would have led to even higher government debt.
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In 2011, the rating agency Standard & Poor’s had already withdrawn the top credit rating of AAA from the USA and referred to divisions between the political camps. The disagreement made it difficult for the world‘s largest economy to control its spending or raise taxes enough to reduce its debt, it said at the time.
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