- Fitch downgraded its US credit rating on Tuesday, citing rising debt and “corruption of governance.”
- The downgrade comes two months after Joe Biden and House Republicans reached an 11-hour deal to prevent a catastrophic default.
- Shares fell after the agency’s shocking announcement.
usually in august the quietest month of the year for the stock market.
But Fitch shattered any sense of summer tranquility last night. lowered the credit score of the US government Ultimately, it could be a huge blow to President Joe Biden’s economic performance.
Here’s everything you need to know about the ratings agency’s shocking move.
what happened?
Fitch on Tuesday downgraded the US long-term rating From highest AAA score to AA+.
This means that just two months after Biden and House Republicans reached a deal, they believe the government is unlikely to be able to service its debt. 11th hour trading to avoid catastrophic defaults.
Fitch said a last-minute deal on a debt ceiling after months of government shutdowns failed to convince Congress that future disaster could be averted.
“Governance standards have steadily declined over the past two decades, including on fiscal and debt issues, despite a bipartisan agreement in June to suspend the debt ceiling until January 2025,” the ministry said in a statement. rice field.
The agency added it was also concerned about rising government debt and the long-term health of programs such as Social Security and Medicare.
How are stock prices reacting?
Even a downgrade would be bad news for the market, with the White House warning that stocks could plunge 45% if the government fails to pay its debts, amid protracted debt ceiling talks earlier this year.
U.S. stocks are expected to fall at the opening bell on Wednesday, with the S&P 500 and Nasdaq Composite futures each down more than 1% as of 5 a.m. ET, according to CME Group data.
The Dow Jones Industrial Average slid 0.8%, while major European and Asian indexes also fell.
But there was also good news for bonds and currencies. Yields on 2-year and 10-year bonds were stable and indicators of US dollar strength were broadly flat.
Has something like this ever happened to you?
Yes, once.
Another ‘Big 3’ credit rating agency, S&P Global, lowered the U.S. government’s debt service score in 2011, again pushing riskier assets down as investors seek a safe haven. Accelerated the decline and the rebound in US Treasurys.
What’s the reaction on Wall Street?
Fitch’s downgrade is a new source of uncertainty for investors. By late Tuesday, investors were enjoying a near-perfect year, with both the S&P 500 and Nasdaq posting significant gains.
“If the debt quality of the world’s largest economy is seen as poor, it will naturally cause investors to worry and reconsider their portfolios,” said Rais Khalaf, head of investment analysis at AJ Bell. rice field.
“Also, given the method, some may be surprised The US economy has proven more resilient than expectedHe added, citing the fact that growth surged into the second quarter of 2023 and the job market remained strong.
Meanwhile, Biden administration officials and top economists condemned Fitch’s move.
U.S. Treasury Secretary Janet Yellen said the decision was “arbitrary and based on outdated data,” while one of her predecessors, Larry Summers, called the downgrade “astrange and incompetent”.
