Asia and European Stocks Fall... Impact of US Credit Rating Downgrade (Comprehensive)

Following a 1-2% decline in Asian stock markets on the 2nd, European markets also opened sharply lower. This is attributed to a rapid deterioration 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% at 7306.88, the UK's FTSE index fell 1.31% to 7565.97, and Germany's DAX index dropped 1.43% to 16,007.08. The DAX index widened its losses during the session, briefly falling below the 16,000 level.

Investors reacted to Fitch's downgrade of the U.S. credit rating, citing increased fiscal deficit risks, by selling off risky assets early in the trading session. The perception that even the world's largest economy is not free from fiscal deficit risks appears to be spreading market anxiety.

[Image source=UPI Yonhap News]

On the previous day, Fitch announced it had downgraded the U.S. long-term foreign currency issuer default rating (IDRs) from 'Triple A (AAA)' to 'AA+'. The rating outlook was changed 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, amid political disputes over the debt ceiling that raised the risk of a federal government default, Fitch had warned of a possible downgrade in May. At that time, Fitch maintained the AAA rating but lowered the outlook to 'Negative Watch,' indicating a high likelihood of downgrade within six months. Fitch had maintained the U.S. credit rating at AAA since 1994.

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 lowered the U.S. rating. In 2011, during the federal debt crisis, S&P downgraded the U.S. rating from 'AAA' to 'AA+'. Moody's still maintains the U.S. credit rating at the highest level (Aaa). As a result, only one of the three major international credit rating agencies (Moody's) continues to rate the U.S. at the highest level.

Meanwhile, experts expect the stock market shock caused by this downgrade to be short-lived. Since S&P already assigns the same AA+ rating as Fitch, and the global financial market operates on the premise that "U.S. Treasury bonds are risk-free assets" and "the dollar is the global reserve currency," it is unlikely that a downgrade by a single credit rating agency will cause major turmoil.

Luke Tilley, chief economist at Wilmington Trust, forecasted, "There will be no damage to the U.S.'s status as the global reserve currency country or risk transmission to the financial system due to the actions of a single credit rating agency."

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