Pitch downgraded to US credit rating 'AA+'... loses 'AAA' for the first time in 29 years (Comprehensive)

Measures Taken After Downgrade Warning in May
Likely Less Impactful Than 2011 S&P Downgrade Incident

U.S. credit rating agency Fitch has abruptly downgraded the United States' credit rating from the highest level, AAA. The repeated conflicts over the U.S. debt ceiling and the widening fiscal deficit were cited as reasons. This is the first time in 29 years that Fitch has downgraded the U.S. rating, which it had maintained since August 1994.

On the 1st (local time), Fitch announced that it had lowered the U.S. credit rating (IDRs·Long-Term Foreign Currency Issuer Default Ratings) from 'Triple A (AAA)' to 'AA+'. The rating outlook was raised from 'Negative Watch' to 'Stable'. Fitch stated, "Considering the expected fiscal deterioration over the next three years and the repeated deadlocks and dramatic resolutions of the debt ceiling over the past 20 years, governance is judged to be deteriorating compared to other countries with AAA ratings."

Since early this year, as a federal government default crisis emerged due to political disputes over the debt ceiling, Fitch had warned of a downgrade in May. At that time, Fitch maintained the AAA credit rating but lowered the rating outlook to 'Negative Watch,' meaning a high possibility of downgrade within the next six months. Fitch had maintained the U.S. credit rating at AAA since 1994.

Along with the downgrade, Fitch also raised the possibility of a recession. Citing declines in consumption and corporate investment as causes, Fitch forecasted that "the U.S. economy will enter a mild recession this year." The growth rate forecasts for this year and next year were presented as 1.2% and 0.5%, respectively. Regarding interest rates, Fitch expected the Federal Reserve (Fed) to raise the upper bound of the benchmark interest rate once more to 5.75% next month and maintain this level until March next year.

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This is the first time in 12 years since S&P downgraded the U.S. credit rating in 2011 that one of the three major credit rating agencies has downgraded the U.S. credit rating. S&P Global downgraded the U.S. credit rating from 'AAA' to 'AA+' by one notch during the federal government debt crisis in 2011. Moody's still maintains the highest credit rating (Aaa) for the U.S. As a result, among the three major international credit rating agencies, only one agency (Moody's) continues to rate the U.S. credit rating at the highest level.

The U.S. government immediately reacted against the downgrade news. After Fitch's announcement of the downgrade, U.S. Treasury Secretary Janet Yellen criticized it as "arbitrary and anachronistic judgment," stating, "Fitch's quantitative evaluation model significantly deteriorated between 2018 and 2020 during the administration of former President Donald Trump." She emphasized, "U.S. Treasury securities are safe and liquid assets, and the U.S. economy is fundamentally strong."

As news of the downgrade of the credit rating of the superpower United States spread, countries around the world are on high alert about how the global financial markets will unfold. The perception is spreading that even the U.S., boasting the world's largest economy, is not free from fiscal deficit risks, which could spread to global financial market instability. The possibility of a credit rating downgrade means higher funding costs, which leads to an increase in the risk premium on U.S. Treasury securities and could raise the U.S.'s capital raising costs. When S&P downgraded the U.S. credit rating on August 5, 2011, a similar global financial market turmoil followed for these reasons.

However, there is also analysis that the impact will not be as significant as the 2011 downgrade incident. This is because S&P has already assigned the same AA+ rating as Fitch. Mark Goldwein, Senior Vice President of the public policy organization 'Committee for a Responsible Federal Budget (CRFB),' pointed out, "The downgrade itself will not cause a sharp rise in borrowing costs. However, if further downgrades occur, the fiscal soundness of the federal government could be jeopardized."

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