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Fitch Lowers U.S. Credit Rating

The long-term credit rating of the United States was downgraded on Tuesday by the Fitch Ratings agency, which said the nation’s high and growing debt burden and penchant for brinkmanship over America’s authority to borrow money had eroded confidence in its fiscal management.

Fitch lowered the U.S. long-term rating to AA+ from its top mark of AAA. The downgrade – the second in America’s history – came two months after the United States narrowly avoided defaulting on its debt. Lawmakers spent weeks negotiating over whether the United States, which ran up against a cap on its ability to borrow money on Jan. 19, should be allowed to take on more debt to pay its bills. The standoff threatened to tip the United States into default until Congress reached a last-minute agreement in May to suspend the nation’s debt ceiling, which allowed the United States to keep borrowing money.

Despite that agreement, the federal government now faces the prospect of a shutdown this fall, as lawmakers spar over how, where and what level of federal funds should be spent. The nonstop dueling over federal spending was a major factor in Fitch’s decision to downgrade America’s debt.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said in a statement. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”

Fitch pointed to the growing levels of U.S. debt in recent years as lawmakers passed new tax cuts and spending initiatives. The firm noted that the U.S. had made only “limited progress” in tackling challenges related to the rising costs of programs such as Social Security and Medicare, whose costs are expected to soar as the U.S. population ages.

Fitch is one of the three major credit ratings firms, along with Moody’s and S&P Global Ratings. In 2011, S&P downgraded the U.S. credit rating amid a debt-limit standoff – the first time the United States was removed from a list of risk-free borrowers.

By one common measure, Fitch’s move downgrades America’s credit rating not only under the rating agency’s own assessment, but also for the blended rating of the three largest agencies.

At the margin, the move by Fitch could limit the number of investors able to buy U.S. government debt, analysts have warned. Some investors are bound by constraints on the quality of the debt they can buy, and those that require a pristine credit rating across the three major agencies will now need to look elsewhere to fulfill investment mandates.

That could nudge up the cost of the government’s borrowing at a time when interest rates are already at a 22-year high. Most analysts, however, doubt that the impact will be severe given the sheer size of the Treasury market and the ongoing demand from investors for U.S. Treasury securities.

Still, the downgrade is a blemish on the nation’s record of fiscal management. The Biden administration on Tuesday offered a forceful rebuttal of the Fitch decision – criticizing its methodology and arguing that the downgrade did not reflect the health of the U.S. economy.

“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset, and that the American economy is fundamentally strong,” Treasury Secretary Janet L. Yellen said in a statement.

Ms. Yellen described the change as “arbitrary” and noted that Fitch’s ratings model showed U.S. governance deteriorating from 2018 to 2020 but that it did not make changes to the U.S. rating until now.

Biden administration officials, speaking on the condition of anonymity, said that they had been briefed by Fitch ahead of the downgrade and made their disagreements known. They noted that Fitch representatives repeatedly brought up the Jan. 6, 2021, insurrection as an area of concern about U.S. governance.

The downgrade came on the same day that former President Donald J. Trump was indicted in connection with his widespread efforts to overturn the 2020 election, which fueled the Jan. 6 riot.

Senator Chuck Schumer of New York, the majority leader, said the Fitch downgrade was the fault of Republicans, who refused to raise America’s borrowing cap without steep concessions. He urged them to stop using the debt limit for political leverage.

“The downgrade by Fitch shows that House Republicans’ reckless brinkmanship and flirtation with default has negative consequences for the country,” Mr. Schumer said.

The debt limit agreement reached in June cuts federal spending by $1.5 trillion over a decade, in part by freezing some funding that was projected to increase next year and capping spending to 1 percent growth in 2025.

Lawmakers and the White House avoided making big cuts to politically sensitive – and expensive – initiatives, including retirement programs. Even with the spending curbs the national debt – which is over $32 trillion – is poised to top $50 trillion by the end of the decade.

It is unlikely that the downgrade by Fitch will convince lawmakers to drastically change the fiscal trajectory of the United States.

“Instead of effectuating change, or fiscal discipline, our base case expectation is that Fitch will be pilloried by most members of Congress,” said Henrietta Treyz, director of macroeconomic policy research at Veda Partners. “It will not yield either deficit reduction, tax increases, reductions in military spending, entitlement reform, or a change to the 12 appropriations bills that have already moved with substantial bipartisan support in the U.S. Senate.”

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