The US credit rating was downgraded by Fitch from AAA to AA+.

The United States’ excellent credit rating was reduced by Fitch from AAA to AA+ on Tuesday, blaming mounting federal debt and an “erosion of governance” that has resulted in debt ceiling standoffs.

Press secretary Karine Jean-Pierre fiercely retaliated against the reduction of the United States from AAA to AA+, stating that the action “defies reality.”

In a separate statement, Treasury Secretary Janet Yellen expressed her “strong” disagreement with Fitch as well, describing the move as “arbitrary and based on outdated data.”

In more than ten years, this is the first major rating downgrade of this kind. A bipartisan uproar resulted from S&P downgrading Washington’s AAA rating in 2011 due to a debt ceiling dispute.

The reduction of the US rating, according to Fitch Ratings on Tuesday, is a result of the country’s substantial and increasing general government debt, the anticipated deterioration of its finances over the next three years, and the deterioration of its governance relative to peers.

It also stated that a stable outlook had been assigned.

Fitch’s quantitative ratings model shrank between 2018 and 2020, according to Yellen, but the agency just announced the change now, despite indications of improvement.

Although raising the US debt ceiling, which places a cap on how much the government may borrow to cover existing expenses, was frequently a routine process, it has recently turned into a divisive political issue.

Mickey Levy of Berenberg Capital Markets stated that there is a “clear short-run implication” of the downgrading, which includes increased bond yields and a possible sell-off in the dollar and stock market.~

However, even though it would cause some investors to temporarily cut their exposure to Treasury bonds, he does not anticipate long-term effects.

Levy pointed out that the growing debt crisis was widely known.

Oxford Economics’ principal US economist, John Canavan, does not believe that the Fitch decision would have a “lasting market impact.”

He told AFP that there were few long-term effects from the S&P downgrading, adding that it was “one key reason for that because it already broke the dam on this front more than a decade ago.”

However, he warned that “psychological support for dollar-denominated debt” would suffer in the near future and cause problems for Treasury auctions at a time when the amount of issuance needs to increase.

A settlement to raise or suspend the debt ceiling in advance of an impending deadline was impeded by growing political animosity, which led Fitch to place the nation’s credit on “rating watch negative” in May.

In June, Fitch maintained a negative outlook for the US even as Congress came to a bipartisan accord to prevent a disastrous default.

“Fitch believes that over the past 20 years, there has been a consistent decline in governance standards, particularly with regard to fiscal and debt matters,” the rating agency stated on Tuesday.

Going forward, Fitch stated, “The ongoing political impasses over debt ceilings and last-minute fixes have eroded confidence in fiscal management.”

It further stated that only “limited progress” has been made in addressing issues linked to growing social security and Medicare expenses as the population ages and that the US government “lacks a medium-term fiscal framework.”

Using their party’s slim majority in the House of Representatives, hard-right Republicans made the decision this year to use the debt ceiling vote as leverage to pressure President Joe Biden into agreeing to cuts to numerous Democratic spending initiatives.

This resulted in a political strength test that almost descended into anarchy before the parties were able to come to an understanding.

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