The Implications Of Fitch Ratings’ U.S. Credit Downgrade

Fitch Ratings sent shockwaves through the financial world this week when it unexpectedly announced a downgrade of the United States’ credit rating from AAA to AA+.

This represents only the second time in U.S. history that a ratings agency has downgraded the country’s debt, the first time being when Standard & Poor’s lowered its rating in response to the government’s handling of the 2011 debt-ceiling crisis.

The rationale for Fitch’s downgrade appears to be much the same. Among the reasons given are the U.S. government’s “repeated [debt] limit standoffs and last-minute resolutions.” The New York City-based agency also cited growing debt fueled by tax cuts and new spending, as well as the rising cost of entitlement programs such as Social Security and Medicare.

(For those keeping score, the combined cost of Social Security and Medicare in June was more than $2.3 trillion, or approximately 9% of U.S. GDP.)

Although the U.S. remains strong with its large, diversified economy and the U.S. dollar’s status as the primary global reserve currency (for now), challenges could lie ahead. Predictions of a mild recession toward the end of 2023 and early 2024, coupled with tightening credit conditions, suggest turbulence may lie ahead.

Repercussions Of The Downgrade

The credit downgrade has already had an impact on Treasuries and stocks, complicating investor sentiment about Treasury debt. Yields pushed higher post-decision, with the 30-year yield exceeding 4.3% on Thursday for the first time since November. (Bond yields rise when prices fall, and vice versa.)

A credit rating downgrade can lead to a number of consequences, perhaps the most obvious being an increase in the country’s borrowing costs due to a perceived greater risk of default. As a result, the U.S. government may end up having to pay more interest on its new debt issues, further deepening its debt burden.

Currently, the government pays nearly $1 trillion in interest alone, or roughly a full third of what it collects in taxes. Meanwhile, the Treasury Department just announced it expects to issue over $1 trillion in new debt in the third quarter.

federal interest payments