Fitch downgrades US rating

Context:

• Global credit rating agency Fitch has downgraded US Sovereign rating from AAA to AA+ citing expected fiscal deterioration over next three years.
• Standard and Poor had downgraded US sovereign credit rating to AA+ in 2011.
• It has retained that rating for the US since then. Moody’s however has given AAA rating to US long term sovereign credit.
• So, after Fitch’s action, two of the three important rating agencies have downgraded US credit rating.

What is the rationale given by Fitch for the downgrade?

• Fitch has pointed towards the bleak US fiscal situation and poor governance over the past decade as reasons for the downgrade.
• The rating agency had some alarming projections on US debt. It projects general government deficit to increase to 6.3 per cent of GDP in 2023 from 3.7 per cent in 2022.
• The government debt­to­GDP ratio is projected to reach 118.4 per cent by 2025 from 112.9 per cent now.
• The report also highlights that interest costs will double by 2033 to 3.6 per cent of GDP and there will be severe shortage of funds needed for healthcare and social security.

What is the implication of the downgrade?

• ‘AA+’ rating from Fitch means that US is no longer among the countries labelled as the safest borrowers, holding AAA ratings.
• The downgrade has pushed the US further away from the league of countries which enjoy AAA ratings from all rating agencies which include Denmark, Australia, Switzerland Germany, the Netherlands, Singapore, Sweden and Norway.

What this downgrade means for debt markets?

• The correlation between credit worthiness and borrowing cost is inverse.
• Lower the credit worthiness, higher the cost of borrowing.
• So theoretically with US ratings downgraded, its cost of borrowings should be higher.