Understanding the Impact of Fitch Ratings’ AA+ Credit Rating Downgrade on the US

Fitch Ratings downgraded the United States’ credit rating from AAA to AA+. This change reflects concerns over the country’s rising debt levels and political uncertainty. The downgrade could lead to increased borrowing costs for the US government, which could have negative implications for the already struggling economy. It also highlights the need for the government to address its long-term debt issues and political gridlock. Fitch’s decision follows similar downgrades by other rating agencies and serves as a warning for policymakers to take action to restore fiscal discipline and regain investor confidence..

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Americans generally expect to be No. 1 at everything. So the downgrade of the country’s credit rating for only the second time ever rattled the country’s pride and the global financial system. The US was stripped of its top-tier sovereign credit rating by Fitch Ratings on Aug. 1, echoing a move more than a decade ago by S&P Global Ratings. Both markdowns were spurred by bitter standoffs over the nation’s borrowing. History suggests that the impact on financial markets may be short-lived, though the move could provide fodder for more political battles.

Fitch said the one-step downgrade to a rating of AA+ reflects an “erosion of governance” that has “manifested in repeated debt limit standoffs and last-minute resolutions.” That’s because every few years, through a policy of its own making, the US faces the prospect of a debt default. A law dating to 1917 led to a fixed aggregate dollar limit on borrowing — the debt ceiling — which can be raised only by agreement of Congress and the president. That specter hung over the US for the first half of 2023 as the US grew perilously close to a debt limit of nearly $31.4 trillion and politicians ran down the clock. The standoff was resolved in late May, but it fueled uncertainty again about the commitment of US political leaders to put risky rhetoric aside and meet bond repayments on a mounting debt burden.

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The downgrade of the US credit rating for the second time in history has shaken American pride and the global financial system. Fitch Ratings recently downgraded the country’s credit rating to AA+ due to an erosion of governance and repeated debt limit standoffs. The US faces a potential debt default every few years due to a fixed aggregate dollar limit on borrowing known as the debt ceiling. This standoff, which was resolved in late May, has raised concerns about the commitment of US political leaders to meet bond repayments and address the growing debt burden. The impact on financial markets may be short-lived, but it could lead to more political battles.

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