Introduction

Fitch Ratings has downgraded the U.S.’s long-term foreign currency issuer default rating from AAA to AA+. This decision is based on the expected fiscal deterioration over the next three years and an increasing general debt burden.

Debt Ceiling Fight and Downgrade

In May, Fitch placed the nation’s AAA rating on negative watch due to the debt ceiling fight. Lawmakers in Washington had disagreements over an agreement to prevent the federal government from running out of money. President Joe Biden signed the debt ceiling bill on June 2, just days before the “X-date” on June 5.

Governance Deterioration

Fitch mentions the recent debt limit feud in the downgrade, stating that there has been a steady deterioration in standards of governance over the last 20 years. The agency highlights the erosion of confidence in fiscal management due to repeated debt-limit political standoffs and last-minute resolutions.

Rising General Government Deficit

Fitch also emphasizes the increasing general government deficit, which is projected to rise to 6.3% of gross domestic product in 2023, up from 3.7% in 2022. While cuts to non-defense discretionary spending offer some improvement to the medium-term fiscal outlook, it remains modest.

Potential Recession

Fitch warns that a combination of tightening credit conditions, weakening business investment, and a slowdown in consumption could lead the economy into a “mild” recession in the fourth quarter of 2023 and the first quarter of the following year.

Previous Downgrade in 2011

This isn’t the first time a rating agency has downgraded the U.S. In 2011, Standard & Poor’s cut the U.S.’s credit rating from AAA to AA+ after Washington managed to avoid default. Political risk was cited as one of the reasons for the downgrade.