Fitch Downgrades US On Deteriorating Fiscal Outlook

Fitch has downgraded the sovereign credit rating of the US to AA+ from AAA with the outlook “stable”, a rating it has had since 1994. It put them on “watch” on May 24 during the debt-ceiling impasse and is not the only agency not to give them the top rating. S&P Global has them at AA+ too (downgraded in August 2011) but Moodys still rates the US at Aaa. Treasury Secretary Yellen “strongly disagrees” with the move and called it “arbitrary” and “outdated”.

• Fitch decided on the downgrade due to the expected fiscal deterioration over the next three years with no further savings to be made ahead of the 2024 elections. It is forecasting this year’s deficit at 6.3% of GDP, a significant deterioration from 3.7% in 2022, with 2024 at 6.6% and 2025 at 6.9%. The cuts agreed with the Republicans to increase the debt ceiling are “only a modest improvement” in the fiscal outlook and while more needs to be done it is unlikely. The savings only amount to 3.9% of GDP by 2033.
• It also cited the increasing debt burden and the “erosion of governance” particularly regarding the “repeated debt limit standoffs” which other AAA nations don’t face. The interest-to-revenue ratio should reach 10% by 2025 which compares with 2.8% median for AA-rated countries and 1% for AAA due to the US’ higher debt and rates.
• The debt ratio is elevated compared to others with 112.9% expected this year up from 100.1% in 2019. It is projected to reach 118.4% in 2025 compared with 62.9% for Australia and 64.4% for Germany (IMF forecasts). The median AAA is 39.3% of GDP and AA 44.7%.
• Fitch also expects the US to have a mild recession starting in Q4 2023 with 2023 growth of 1.2% and 0.5% in 2024 (IMF is at 1.8% and 1%). It also expects one more hike from the Fed by September.
• There has been some market reaction with the greenback under some marginal pressure and US equity futures lower (see MNI commentary).
• See report here.