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US Credit Rating Remains Under Scrutiny Despite Recent Debt Ceiling Lift

Despite the debt limit agreement, Fitch Ratings maintains a negative watch on America's AAA rating.

Fitch Ratings logo
Fitch Ratings logo

Debt Ceiling Agreement Doesn't Shift Fitch's Stance

Despite the recent bipartisan legislation, backed by President Joe Biden, lifting the government's $31.4 trillion debt ceiling, Fitch Ratings maintains a negative watch on the United States' AAA credit rating. This decision follows months of disputes between Democrats and Republicans leading to the Senate's decision on Thursday.

Why The Political Standoffs Matter

Although the agreement represents a positive development in a heated political environment and promises modest fiscal deficit reduction over the next two years, Fitch has expressed concerns. The agency believes that frequent political standoffs around the debt limit, often resulting in last-minute suspensions, have undermined confidence in governance on fiscal and debt matters.

The Concerns Of Deteriorating Governance

Fitch pointed out that there has been a steady deterioration in governance over the past 15 years. The increasing political polarization, constant brinkmanship regarding the government's borrowing cap, and ever-growing fiscal deficits and national debt have all played into this.

Fitch's Watch and the Future Review

Last week, Fitch placed the United States' credit rating on a watch for possible downgrade. The agency affirmed its intent to conclude its review by the third quarter of this year. It emphasized that the coherence, credibility of policymaking, and projected medium-term fiscal and debt trajectories will be central to its assessment.

US Treasury Yields and Market Reactions

Market reactions to Fitch's announcement were mixed, with US Treasury yields initially rising but subsequently falling back. The benchmark US 10-year note last stood at 3.6811%.

Analysts Comment on Government Borrowing Practices

Washington policy analyst Ed Mills has said that Fitch's decision reflects the absence of structural changes in how the government handles its borrowing limit despite the debt agreement. He warned of recurring drama and potential mistakes unless fundamental changes are made.

Potential Downgrade Despite Agreements

Some analysts have warned that even if House Republicans and the White House agree, rating agencies could downgrade the US government's credit rating. This scenario was previously seen in 2011 when S&P reduced the US rating by one notch even though a default was narrowly averted.

Impact of Credit Ratings on Investors

Credit ratings serve as a vital tool for investors in evaluating the risk profiles of governments and corporations. A lower rating generally results in higher financing costs for the borrower, influencing investment decisions and strategies.