[New York Diary] Fitch's Warning Cannot Be Ignored

Wall Street Responds to Fitch's Downgrade:
Limited Market Impact, But National Debt Concerns Grow
Experts Warn of "Gray Rhino" Risks as U.S. Fiscal Health Deteriorates
Debate Intensifies Over Whether Washington Will Pursue Real Reform

Last week, Wall Street in the United States was abuzz over the global credit rating agency Fitch's downgrade of the U.S. national credit rating from AAA to AA+. Summarizing the opinions that poured out from Wall Street immediately afterward, there are three main points. First, the impact on the U.S. financial market or the federal government's borrowing capacity will be limited. Second, considering economic indicators, the timing of the downgrade decision seems unexpected. Third, the national debt issue pointed out by Fitch should be closely monitored.

[Image source=AP Yonhap News]

The Wall Street forecast that the first credit rating downgrade in 12 years would not cause significant ripple effects in the financial market seems to be holding true so far. The downgrade of the U.S. credit rating did not shake the position of U.S. Treasury bonds as safe assets, naturally. Over the past few days, Treasury yields showed mixed trends between short- and long-term bonds with relatively low volatility, and toward the end of the week, yields declined (bond prices rose). No rapid sell-off or buying frenzy of concern was observed. The New York stock market also showed a downward trend for several days but is likely to be a short-term event. This is because the economic conditions now are markedly different from those in 2011 when S&P downgraded the rating amid an impending federal government default.

Having been wary of a possible 2011 d?j? vu, Wall Street is now carefully examining Fitch's warning. Fitch cited political conflicts over raising the federal government's debt ceiling, fiscal deterioration, and national debt burden as reasons for the U.S. credit rating downgrade. According to Fitch, the U.S. national debt-to-GDP ratio is projected to reach 118% by 2025. Considering that the median ratio for countries with AAA ratings is 39%, this is about three times higher.

Locally, there are even remarks that this downgrade is "overly optimistic" if only the "fiscal" aspect is considered. This underscores the seriousness of the U.S. national debt problem. The Wall Street Journal (WSJ) likened Fitch's warning to a "gray rhino" situation?a risk that is highly probable and impactful but often overlooked?and expressed concerns that the U.S. fiscal burden issue will become more prominent in the future. The Washington Post (WP) stated, "Clearly, the timing of Fitch's downgrade announcement was odd," but also emphasized, "We must not ignore concerns about the long-term trajectory of national debt."

David Beers, who was the lead analyst at S&P during the 2011 credit rating downgrade, also expressed that Fitch's recent decision is justified. In an interview with Bloomberg TV, he warned that the current issues emerging in the U.S. resemble the factors that played a decisive role in S&P's downgrade 12 years ago. He pointed out, "The deterioration of U.S. fiscal health and the national debt burden are accelerating," and noted that some problems, such as political brinkmanship, have worsened compared to the past. Fitch's decision is seen as reaffirming S&P's 2011 judgment.

As Beers mentioned, massive debt, growing interest burdens, and surging social security costs due to baby boomer retirements have long been cited as concerns within the U.S. These problems are worsening amid political strife that has lost its original function. The U.S. federal government debt exceeds $31 trillion. The debt-to-economy ratio is expected to surpass World War II levels by 2029. According to the Congressional Budget Office (CBO), net interest payments for the 2024 fiscal year are estimated at $745 billion, which corresponds to about three-quarters of all discretionary spending excluding defense.

The key question is whether this downgrade incident will lead to substantive reform efforts within the U.S. Everyone knows that Fitch's warning, summarized as "excessive spending, tax cuts, and governance deterioration due to political strife," is essentially a warning directed at Washington politics. This incident confirmed that even the United States, as the issuer of the world's reserve currency, cannot avoid a decline in national creditworthiness if fiscal soundness deteriorates. For a Korean journalist who has always included South Korea's household debt issue in interviews with local economic experts, the thought can be summed up in one phrase: This is not someone else's problem.

This content was produced with the assistance of AI translation services.