Fitch cuts US credit rating to AA+; Treasury calls it 'arbitrary'

Rating agency Fitch on Tuesday downgraded the US government's top credit rating, a move that drew an angry response from the White House and surprised investors, coming despite the resolution two months ago of the debt ceiling crisis.

Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.

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Fitch had first flagged the possibility of a downgrade in May, then maintained that position in June after the debt ceiling crisis was resolved, saying it intended to resolve the review in the third quarter of this year. With the downgrade it becomes the second major rating agency after Standard & Poor’s to strip the United States of its triple-A rating.

The dollar fell across a range of currencies, stock futures ticked down and Treasury futures rose after the announcement. But several investors and analysts said they expected the impact of the downgrade to be limited.

Fitch's move came two months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement following months of political brinkmanship. The deal lifted the government's $31.4 trillion borrowing limit.

"In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," the rating agency said in a statement.

"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," it said.

US Treasury Secretary Janet Yellen said she disagreed with Fitch's downgrade, in a statement that called it "arbitrary and based on outdated data."

The White House had a similar view, saying it "strongly disagrees with this decision".

"It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world," said White House press secretary Karine Jean-Pierre.

Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets. Generally, the lower a borrower's rating, the higher its financing costs.

“This was unexpected, kind of came from left field," said Keith Lerner, co-chief investment officer at Truist Advisory Services in Atlanta. "As far as the market impact, it’s uncertain right now. The market is at a point where it’s somewhat vulnerable to bad news.”

Treasury 10-year futures rose slightly, indicating a lower yield, while the dollar moved lower against a basket of major currencies after the announcement. US stock index futures had yet to resume trading.

In a previous debt ceiling crisis in 2011, Standard & Poor's cut the US top 'AAA' rating by one notch a few days after a debt ceiling deal, citing political polarization and insufficient steps to right the nation's fiscal outlook. Its rating is still 'AA-plus' - its second highest.

After that downgrade, US stocks tumbled and the impact of the rating cut was felt across global stock markets, which were at the time already in the throes of a financial meltdown in the euro zone. Paradoxically, US Treasuries prices rose because of a flight to quality from equities.

In May, Fitch had placed its "AAA" rating of US sovereign debt on watch for a possible downgrade, citing downside risks, including political brinkmanship and a growing debt burden.

A Moody's Analytics report from May said a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.

Other analysts had pointed to the risk that another downgrade by a major rating agency could affect investment portfolios that hold top-rated securities.

Raymond James analyst Ed Mills, however, said on Tuesday he did not anticipate markets to react significantly to the news.

"My understanding has been that after the S&P downgrade a lot of these contracts were reworked to say 'triple-A or 'government-guaranteed', and so the government guarantee is more important than the Fitch rating," he said.

Others echoed similar views.

"Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the US economy and markets," Mohamed El-Erian, President at Queens' College, said in a LinkedIn post.