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11 WORLD 3.8.2023 THE US has seen its credit rat- ing downgraded from AAA to AA+ by Fitch, citing "repeated debt limit standoffs" that threat- ened to result in the country de- faulting on its debt. In a statement yesterday (1 August), Fitch pointed to the "expected fiscal deterioration over the next three years" in the country, as well as the "steady deterioration in standards of governance" In May, Congress reached a conclusion to their debate over the debt ceiling, with a deal be- ing reached after months of ne- gotiations and threats that the US may default on its debt. Congress must vote to raise the amount it can borrow to pay for spending it has already committed to, also known as the debt ceiling, with the next dead- line set for January 2025. Brinkmanship over debt ceil- ing negotiations and "last-min- ute resolutions" had increased in recent years Fitch said, which has "eroded confidence in fiscal management". e most recent fight over the debt ceiling saw some Republi- cans in Congress suggest that the US should default on its debt rather than continue to increase, an idea that worried markets. "ese factors, along with sev- eral economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade," said the ratings agency. "Additionally, there has been only limited progress in tackling medium-term challenges relat- ed to rising social security and Medicare costs due to an aging population." Government deficit is expect- ed to increase in the US, rising to 6.3% of GDP this year com- pared to 3.7% of GDP in 2022. Furthermore, state and local government deficits will jump from a 0.2% of GDP surplus last year to a 0.6% deficit. As interest rates rises, debt will be harder to pay off, with Fitch noting that the interest-to-rev- enue ratio is expected to reach 10% by 2025, compared to 2.8% for the AA median and 1% for the AAA median. erefore, the rating agency's proprietary Sovereign Rating Model calculated the US should receive a score of AA+ on its Long-Term Foreign-Currency IDR scale. However, Fitch did still note that the US has "exception- al strengths" due to being the world's largest economy and owning the "world's preeminent reserve currency". Fellow ratings agency Moody's retains an AAA rating for the country, while S&P also reduced the US to AA+ in 2011 due to similar debt ceiling negotia- tions. "Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the US economy into a mild recession in 4Q23 and 1Q24, according to Fitch pro- jections," it added. It forecasted the country will see real GDP growth slow to 1.2% this year and just 0.5% in 2024, as the labour force partic- ipation rate remains lower than pre-pandemic levels. US Treasury secretary Janet Yellen described the decision as "arbitrary and based on outdat- ed data". "Fitch's quantitative ratings model declined markedly be- tween 2018 and 2020, and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its deci- sion," she said. THE US's credit rating has been downgraded after the months long debate over raising the debt limit that brought the country to the brink of default. Fitch has brought down the rating from AAA - the high- est possible - to AA+ over debt and governance concerns. Lower credit ratings can increase the cost of government borrowing, adding to taxpayer bills. US officials have criticised the move, with Treasury Sec- retary Janet Yellen calling it "arbitrary" and "based on out- dated data". Similarly White House press secretary Karine Jean-Pierre said, "It defies reality to downgrade the United States at a moment when President Biden has delivered the strong- est recovery of any major economy in the world." US President Joe Biden signed a deal in June to increase the debt ceiling, enabling the country to continue mak- ing debt repayments, after months of debate and political stand offs. e bill won bipartisan support after both Republicans and Democrats made concessions on spending. But Fitch said there had been a "steady deterioration in standards of governance" and the "last minute resolutions" prompted the revision. It was not the first time the US, and global economy as a result, came close to a potential financially catastrophic default. In 2011 President Obama battled it out with Republicans to eventually raise what was a $14.3trn debt ceiling. Fitch is only the second ratings agency to bring down its US rating. Of the three major credit rating firms Moody's maintains AAA but Standard & Poors bought down their measure down to AA+ in 2011, after the previous debt limit fight. e US Government Accountability Office, in a 2012 re- port, estimated the 2011 standoff raised state borrowing costs by $1.3bn that year. US loses Fitch AAA rating following debt ceiling turmoil White House says Fitch downgrade 'defies reality' Fitch made the decision due to "deterioration in standards of governance" and "last minute resolutions" to the debt ceiling deadline, it said. e White House has criticised the move Fitch said that brinkmanship over debt ceiling negotiations and "last-minute resolutions" had increased in recent year, which has "eroded confidence in fiscal management"

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