Credit Downgrade and Its Reasons
Fitch Ratings has downgraded the US’ sovereign credit grade from AAA to AA+ due to ballooning fiscal deficits and erosion of governance. This deterioration in governance over the last two decades has caused repeated debt limit emergencies.
Impact on Borrowing Costs
A lower credit rating may raise borrowing costs for the US. The country’s debt burden is expected to reach 118 percent of GDP by 2025, making it vulnerable to future economic shocks.
Reactions and Surprises
US Treasury Secretary Janet Yellen called the downgrade ‘arbitrary and outdated’, stating that Treasury securities remain safe assets. Many economists and officials expressed surprise and criticized the decision.
Following the downgrade, yields on two-year Treasuries fell, and there was uncertainty in the stock market.
Political Blame Game
Democrats blamed Republicans for the default crisis, while Republicans cited ‘Bidenomics’ for the downgrade.
Asian Market Impact
Asian stocks traded lower after the Fitch decision, leading to short-term uncertainty.
Source: Bloomberg, Reuters, and other agencies