This is a free excerpt from one of Shortform’s Articles. We give you all the important information you need to know about current events and more.
Don't miss out on the whole story. Sign up for a free trial here .
What is a government credit rating? What does Fitch’s credit rating mean for the United States?
Fitch Ratings, one of the major financial institutions that assign credit ratings to national governments, recently lowered the United States’ credit rating from AAA to AA+. In principle, the lower rating could make it harder for both the US government and US corporations to raise money.
Here’s a background on sovereign credit ratings and the impact of the lowered rating.
US Fitch Rating Downgraded
On August 1, 2023, Fitch Ratings downgraded the United States’ credit rating from AAA to AA+—a move that triggered political debate and finger-pointing. However, most analysts have few immediate concerns. This article examines why.
Fitch is one of four major agencies that assign credit ratings to national governments (as well as other borrowers). The other three are S&P Global Ratings, Moody’s Corporation, and DBRS Morningstar. Fitch’s credit rating was the only one to go down this year.
What do Sovereign Credit Ratings Mean?
Fitch (and other credit rating agencies) assigns national credit ratings on a scale of D to AAA based on the likelihood of the nation defaulting on its treasury bonds. Double and triple letters indicate higher credit than the same letter alone, and pluses and minuses indicate higher or lower ratings, so AA+ is lower than AAA but higher than AA.
Generally, the higher a nation’s credit rating, the easier it is for the government to borrow money by selling treasury bonds, and the less interest it will have to pay on the bonds to make them attractive to investors.
Why did Fitch downgrade the United States’ credit rating?
Fitch gave several reasons for downgrading the US rating:
- Increased political tensions over fiscal policy, resulting in deadlocks and last-minute resolutions when Congress addresses issues like the debt ceiling.
- Large and growing debt and deficits: Fitch notes that, as a percentage of GDP (gross domestic product, the dollar value of all goods and services produced in a country annually), the US national debt is more than twice the median debt for countries with AAA credit ratings—or even AA credit ratings, for that matter.
- Recession: Fitch observes that the growth of the US economy has slowed, and they expect the economy to go into recession in the near future, reducing the GDP.
- High interest and inflation: The Federal Reserve has raised interest rates to combat inflation, but core inflation remains above 4%.
Government officials expressed frustration over Fitch’s decision. They argued that concerns about out-of-control government spending are, at best, outdated. They assert that fiscal policy has improved under the current administration, saying that between recent cuts and the end of most of the temporary pandemic relief programs, they’ve reduced federal spending by $1.7 trillion.
Who Will the Downgrade Affect?
In principle, the credit rating downgrade poses a risk of capital becoming more difficult to obtain for both the government and private industry in the United States. But most analysts agree that, in practice, the impact will be minimal.
Impact on Government
The Risk: The US government’s lower credit rating could make US treasury bonds less attractive to investors, making it harder for the US government to borrow money.
The Reality: AA+ is still a very good credit rating, and Fitch’s decision doesn’t reflect any new information or developments beyond what most investors were already aware of.
Impact on Private Industry
The Risk: The drop in the US government’s credit rating could signal to investors that the United States is not as economically stable as it used to be, and thus that stock in US companies carries a higher risk.
The Reality: This effect will probably be short-lived, based on historical precedent. When S&P downgraded the US’s credit rating in 2011, the US stock market dropped by about 8% over a few months but then recovered.
Want to fast-track your learning? With Shortform, you’ll gain insights you won't find anywhere else .
Here's what you’ll get when you sign up for Shortform :
- Complicated ideas explained in simple and concise ways
- Smart analysis that connects what you’re reading to other key concepts
- Writing with zero fluff because we know how important your time is
