Global credit rating agency Fitch Ratings has downgraded the US long term credit rating from ‘AAA’ to ‘AA+’ with stable outlook, citing multiple reasons. Major stock markets around the world plummeted post the downgrade with Sensex, Nikkei and Hang Seng shedding 1.02%, 2.30% and 2.47% in Asian hours, FTSE and DAX losing 1.36% both during European trading hours and Nasdaq, S&P 500 started off in red on the opening bell of US trading session. Major drivers as cited by the Fitch on the downgrade includes expected fiscal deterioration over next 3 years, erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over last two decades (resulting in repeated debt-ceiling standoffs and last minute resolutions) and a high and growing federal government debt burden.
According to the report by Fitch, current government lacks medium term fiscal framework and has a complex budgeting process, unlike most peers. In addition to this, Fitch expects general government fiscal decifit to increase to 6.3% in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, increading tax burden and new spending initiatives. The credit rating agency has also forcasted/projected a mild US recession in Q4 of 2023 and Q1 of 2024 on account of tighter credit conditions, weakening business investment and a slowdown in consumption. Apart from high benchmark federal funds rate, the Federal Reserve has continued to reduce its holdings of mortgage backed securities and US Treasuries, with the balance sheet falling by over USD 500 billion as of July 2023.