2023-08-02 02:33:15
Fitch justified his decision on Tuesday primarily by the consequences of “repeated impasses on the debt ceiling”, stressing that these “political confrontations (…) and last-minute resolutions have eroded confidence in budgetary management”.
At regular intervals, the debt ceiling needs to be raised by Congress so that the country escapes default. This procedure has become the object of an intense and repeated political battle. Thus, at the beginning of June, the administration of Democratic President Joe Biden and the Republican opposition had reached an agreement in extremis. Yet beyond this agreement, “there has been a steady deterioration in governance standards over the past 20 years, including in fiscal and debt matters,” Fitch lamented.
No lasting impact on the markets
His decision, unexpected and unprecedented for more than 10 years within the three main rating agencies, did not seem to worry analysts interviewed Tuesday evening by AFP. “I don’t expect the downgrade to have a lasting impact on the market,” commented John Canavan of Oxford Economics, who does not anticipate “major volatility” when US markets open on Wednesday. Morning.
In the short term, however, this “might lead some investors to reduce their exposure to the Treasury”, notes for his part Mickey Levy, of Berenberg. But in the longer term, he sees “no serious implications. I think everyone is quite aware of the growing debt situation.”
“We strongly disapprove of this decision,” responded White House spokeswoman Karine Jean-Pierre in a statement, accusing the administration of the previous President of the United States, Republican Donald Trump, of having led to a deterioration in the criteria taken into account by Fitch to establish its ratings. “It flies in the face of reality to downgrade the United States at a time when President Biden has achieved the strongest recovery of any major economy in the world,” she added.
In the sights of the Biden administration: Donald Trump’s tax reform in 2017, which had reduced the taxes of the richest and those of companies. Republicans, for their part, regularly accuse Democrats of reckless spending.
Lack of budgetary framework
Tax cuts, but also significant spending, were also singled out by Fitch in his decision, without however targeting any administration specifically. The “expected budgetary deterioration over the next three years”, as well as “a high and growing public debt burden”, thus represent significant risks, according to the rating agency.
“The government does not have a medium-term budgetary framework (…) and has a complex budgetary process. These factors, along with several economic shocks, tax cuts and new spending initiatives, have contributed to successive increases in debt over the past decade,” Fitch noted.
“Furthermore, only limited progress has been made to address the medium-term challenges related to rising pension and health insurance costs due to the aging population,” it further underlined. rating agency.
Fitch warned at the end of May that it might downgrade the United States’ rating because of the risk of default. The outlook changes from negative to stable, which means that Fitch does not anticipate any further deterioration in the short term.
Read also: The UN denounces the power of rating agencies
While many economists, in particular those of the American central bank (Fed), no longer anticipate a recession for the United States, Fitch is still counting on a “slight” contraction of American GDP in the 4th quarter of 2023 and 1st quarter of 2024 .
The agency notes, despite its criticisms, that the US economy is “well diversified” and has “high income, supported by a dynamic business environment”. The US dollar is the world’s most important reserve currency, which gives the government extraordinary funding flexibility.
Read also: The shortage of dollars returns to the forefront
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