The Growing U.S. Government Debt: A Historic Downgrade
Fitch Ratings has downgraded the U.S. credit rating from AAA to AA+ due to the expected fiscal deterioration and growing government debt burden. This downgrade has sparked concerns among investors and financial markets, although renowned investor War...
Troy D. Hanson
August 04, 2023
Over the past decade, the United States government has seen its debt load steadily increase, a trend exacerbated by the COVID crisis. Fitch Ratings, a leading credit rating agency, made a significant move on Tuesday by downgrading the U.S.'s credit rating from AAA to AA+. This downgrade follows a last-minute deal between Congress and the White House to suspend the U.S. debt limit through 2025, temporarily averting the threat of a catastrophic debt default.
Fitch cited several reasons for this unprecedented downgrade. These include the "expected fiscal deterioration," a "high and growing" government debt burden, and an "erosion of governance" in response to repeated debt-limit standoffs in Congress and other challenges.
The chart provided offers a visualization of the U.S. debt relative to the gross domestic product (GDP) since 2000. According to Fitch's projection, the debt is expected to rise to 118% by 2025. The lower half of the chart highlights the increasing costs of interest payments.
Initially, the stock market responded with surprise to Fitch's one-notch downgrade. However, this impact appears to have diminished, as the S&P 500 index (SPX), Dow Jones Industrial Average (DJIA), and Nasdaq Composite Index (COMP) all rebounded and turned higher in afternoon trade on Thursday.
US Debt Downgrade: Impact and Outlook
The recent downgrade of the US debt by Fitch has sparked concerns among investors and financial markets. However, this is not the first time such an event has occurred. In fact, a similar downgrade by S&P Global a decade ago had already prepared the market for such shocks, leading to a de-emphasis of credit ratings in the investment process.
The primary reason for the downgrade, as stated by BCA Research, was an erosion in confidence over US fiscal governance. This loss of confidence was triggered by a heated US debt ceiling showdown in Washington D.C. Furthermore, Fitch also cited a worsening near-term outlook for US debt dynamics as one of the factors leading to the downgrade.
Despite this downgrade, investors seemed more focused on other factors impacting the market. The U.S. 10-year Treasury yields soared to around 4.17% on Thursday. However, the market's attention remained fixed on the $1 trillion Treasury borrowing plan for the third quarter and the wave of Treasury issuance, rather than the debt rating downgrade.
Commenting on the situation, BCA researchers stated that investors will have to adapt to the US no longer being an AAA-rated country. While concerns may arise from such a downgrade, renowned investor Warren Buffett dismisses them, advising against unnecessary worry.
Read: Warren Buffett dismisses Fitch downgrade: ‘There are some things you shouldn’t worry about’