The reaction to Fitch Ratings’ downgrade of the US’s pristine debt rating played out on a split screen on Wednesday: outrage from the White House and calm in the market for treasury bonds assessed by the agency.
Fitch late on Tuesday lowered the US long-term rating one rung from triple A to double A plus, citing the country’s growing debt burden and an “erosion of governance”, including on fiscal matters.
The Biden administration reacted with anger, sending out a release citing pundits calling the decision “off-base”, “absurd” and “widely & correctly ridiculed”.
[ US stripped of top credit rating as budget deficits swellOpens in new window ]
[ Global shares fall as investors digest downgrading of US credit ratingOpens in new window ]
“It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any big economy in the world,” said Karine Jean-Pierre, the White House press secretary.
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The White House appeared to fear that the downgrade gave Republicans a new opening to accuse Biden officials of mishandling America’s public finances. Democrats had hoped that the budget deal struck with Republican speaker Kevin McCarthy to avoid a debt default in June had put those criticisms to rest.
The action by Fitch came after S&P similarly downgraded the US to double A plus in 2011, following a debt ceiling showdown when Democrat Barack Obama was president.
Fitch raised a red flag over “a steady deterioration in standards of governance over the last 20 years” even with the latest deal to suspend the debt limit until January 2025.
US treasuries, which constitute the biggest bond market in the world, are widely held because they are understood to be extraordinarily safe. A lower credit rating means Fitch believes there is a greater risk of a US default.
“I think it is completely and totally irrelevant,” said Eric Winograd, director of developed market economic research at AllianceBernstein, the asset manager. “I have been trying to come up with a reason why investors would care about this, and I have not been able to.”
“We do not believe there are any meaningful holders of treasury securities who will be forced to sell due to a downgrade,” Goldman Sachs said in a note.
Goldman also noted that S&P’s US downgrade in 2011 ultimately had little effect on markets.
Treasury markets reacted modestly to the Fitch decision and the US plan to increase borrowing unveiled on Wednesday. – Copyright The Financial Times Limited 2023
