Fitch downgrades US credit rating due to 'erosion of governance'

Fitch has downgraded the United States' credit rating by a step from the top-tier AAA to AA+, citing factors like an "erosion of governance" that has manifested in debt limit standoffs.

The move on Tuesday is not unprecedented, with a debt ceiling impasse in 2011 leading S&P to lower Washington's AAA rating as well, drawing bipartisan outrage.

"The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance" relative to peers, said Fitch in a statement.

It added that there was a stable outlook assigned.

On Tuesday, Treasury Secretary Janet Yellen said she "strongly" disagreed with Fitch's decision, calling it "arbitrary and based on outdated data."

She said that Fitch's quantitative ratings model declined between 2018 and 2020 but the agency was only announcing its change now despite progress seen in indicators.

Yellen stressed that "Treasury securities remain the world's preeminent safe and liquid asset, and that the American economy is fundamentally strong."

A senior official in the US President Joe Biden administration also said the downgrade is a "bizarre and baseless" decision that ignores a resilient US economy and a moment of bipartisan agreement on raising the federal debt ceiling.

The official told reporters on a conference call objecting to the downgrade that Fitch's decision was based on outdated data and relied on a reduced governance score that occurred during the Trump administration.

But Fitch had opted to stop considering factors that had previously kept the US rating at the top AAA level, the official added.

While the lifting of the debt ceiling – a limit on government borrowing to pay for bills already incurred – was often routine, it has become a contentious issue for several years.

'Steady deterioration'

In May, Fitch placed the country's credit on "rating watch negative," reflecting increased political partisanship that hampered a resolution to raise or suspend the debt limit ahead of a looming deadline.

While lawmakers reached a bipartisan agreement to avert a catastrophic default, Fitch in June kept the US on negative watch.

"In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters," the agency said on Tuesday.

"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," Fitch added.

It also said the US government "lacks a medium-term fiscal framework" and has seen only "limited progress" tackling medium-term challenges related to rising social security and Medicare costs due to an ageing population.

This year, hard-right Republicans dominating their party's narrow majority in the House of Representatives decided to use the debt limit vote as leverage for forcing President Joe Biden into accepting cuts to many Democratic spending priorities.

This triggered a test of political strength that threatened to end in chaos before the two sides reached an agreement on the debt ceiling while freezing some budgetary spending in return – yet stopping well short of Republican demands for cuts.