US Credit Rating Downgrade Causes European Stocks to Fall Over 1%

Following a 1-2% decline in Asian stock markets on the 2nd, European markets also opened lower. This is due to a sharp contraction in overall market sentiment after global credit rating agency Fitch downgraded the United States' credit rating for the first time in 29 years.

As of 5:28 PM KST on the 2nd, France's CAC index was down 1.34% from the previous close at 7306.88, the UK's FTSE index fell 1.31% to 7565.97, and Germany's DAX index was down 1.43% at 16,007.08.

Investors reacted to Fitch's downgrade of the US credit rating from 'AAA' to 'AA+' citing increased fiscal deficit risks, leading to a strong risk-averse sentiment and early selling pressure in the market. The perception that even the world's largest economy, the US, is not free from fiscal deficit risks is spreading, causing instability in global financial markets.

This is the first time in 12 years since 2011 that the three major credit rating agencies have downgraded the US credit rating. In 2011, during the federal government debt crisis, S&P downgraded the US rating from ‘AAA’ to ‘AA+’. Moody's still maintains the US credit rating at the highest level (Aaa). As a result, among the three major international credit rating agencies, only one (Moody's) continues to rate the US at the highest grade.

Experts expect the market shock caused by this downgrade to be short-lived. The global financial market, which operates on the premise that 'US Treasury bonds are risk-free assets' and 'the dollar is the key currency,' is unlikely to experience major turmoil due to a downgrade by a single credit rating agency.

Luke Tilley, chief economist at Wilmington Trust, told the WSJ, "There will be no occurrence where the US's status as the key currency country is undermined or risk transmission to the financial system occurs due to the action of a single credit rating agency."

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