Fitch Ratings Expresses Concerns Over US Rating Despite Debt Limit Resolution

Despite the U.S. successfully avoiding defaulting on its debt obligations, Fitch Ratings remains apprehensive about the nation’s ability to repay its debts. Consequently, the credit rating agency has placed the U.S. credit rating of “AAA” on negative watch, highlighting that recent developments have undermined “confidence in governance on fiscal and debt matters.”

Fitch Ratings Maintains Worries about the US

Fitch Ratings, one of the three major credit rating agencies in the U.S., declared on Friday that the United States’ “AAA” credit rating continues to be on “negative watch,” despite the recent debt limit agreement reached in Congress. The other two prominent rating agencies in the U.S. are Moody’s Investors Service and Standard & Poor’s.

The U.S. managed to avert default on its debt obligations after Congress passed a bill on Friday to suspend the debt limit until January 1, 2025. Treasury Secretary Janet Yellen stated that without this agreement, the country could have defaulted on its debt obligations by June 5.

“The suspension of the debt limit was as expected and aligned with Fitch’s view of the United States’ ‘AAA’ sovereign rating,” noted the rating agency. However, the company explained:

Repeated political standoffs concerning the debt limit and last-minute suspensions before the x-date (when the Treasury’s cash position and extraordinary measures are depleted) diminish confidence in governance on fiscal and debt matters.

“In fact, governance has steadily deteriorated over the past 15 years due to increasing political polarization and partisanship, as evidenced by the contested 2020 election, recurring brinkmanship over the debt limit, and failure to address fiscal challenges arising from escalating mandatory spending, resulting in growing fiscal deficits and debt burden,” elaborated Fitch.

While acknowledging that the U.S. rating is supported by exceptional strengths such as the size of the economy, high GDP per capita, and a dynamic business environment, Fitch highlighted:

The U.S. dollar remains the primary reserve currency globally, granting the government unparalleled financing flexibility. However, some of these strengths could be undermined over time due to governance shortcomings.

Several individuals have cautioned that the debt crisis may erode the dominance of the U.S. dollar, including veteran investor Jim Rogers and economist Peter Schiff. Nonetheless, some proponents argue that the USD will continue to serve as the world’s reserve currency. Moody’s, for instance, stated last month that the U.S. dollar will retain its position as the dominant currency in international trade and finance for decades to come, despite facing new challenges.

We would like to hear your thoughts on Fitch Ratings’ concerns. Please share your opinions in the comments section below.

Frequently Asked Questions (FAQs) about US credit rating, concerns

What are Fitch Ratings’ concerns about the US credit rating?

Fitch Ratings has expressed concerns about the US credit rating despite the recent debt limit resolution. They highlight governance issues and doubts regarding the country’s ability to repay its debts as the key areas of worry. Fitch believes that repeated political standoffs and failure to address fiscal challenges have contributed to a deteriorating governance environment.

How has the US government avoided defaulting on its debt obligations?

The US government managed to avoid defaulting on its debt obligations by passing a bill in Congress to suspend the debt limit until January 1, 2025. This temporary suspension provides relief and allows the government to continue meeting its financial obligations without defaulting.

What impact does Fitch Ratings’ negative watch on the US credit rating have?

Fitch Ratings’ decision to place the US credit rating on negative watch indicates their concerns about the country’s ability to repay its debt. While the US still maintains its “AAA” rating for now, the negative watch reflects a decreased confidence in governance on fiscal and debt matters. It serves as a warning that the rating may be downgraded in the future if the concerns are not addressed.

Could the US dollar’s dominance be affected by the debt crisis?

There are differing opinions on the potential impact of the debt crisis on the dominance of the US dollar. Fitch Ratings suggests that governance shortcomings could erode some of the strengths that support the US dollar’s status as the world’s preeminent reserve currency. However, other sources, such as Moody’s Investors Service, believe that the US dollar will remain the dominant currency in international trade and finance for the foreseeable future, despite facing new challenges.

How do other credit rating agencies view the US credit rating?

The other two major credit rating agencies in the US, Moody’s Investors Service and Standard & Poor’s, have not provided public statements specifically addressing the recent debt limit resolution. However, Moody’s has previously stated that they believe the US dollar will maintain its role as the dominant currency in international trade and finance, indicating a more optimistic outlook compared to Fitch Ratings. It’s important to note that credit rating agencies may have slightly different criteria and assessments when evaluating creditworthiness.

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