The long-term credit rating of the United States was downgraded on Tuesday by the Fitch Ratings agency which led to stocks falling worldwide, with the BSE Sensex spiralling 1000-points downwards intra-day before a late recovery. The rupee fell 45 paise, its steepest in six months.
Fitch attributed the downgrade to the US’s high and growing debt burden. Besides, the penchant for brinkmanship over the country’s authority to borrow money had eroded confidence in its fiscal management.
Fitch lowered the US 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 January 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.
“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 is one of the three major credit ratings firms, along with Moody’s and S&P Global Ratings. In 2011, S&P downgraded the US credit rating amid a debt-limit standoff — the first time the United States was removed from a list of risk-free borrowers.
At the margin, the move could nudge up the cost of the government’s borrowing at a time 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 US 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 — criticising its methodology and arguing that the downgrade did not reflect the health of the US 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,” US treasury secretary Janet L. Yellen said in a statement.
Stocks tumble
Global shares dropped and US treasury yields dipped on Wednesday after the Fitch downgrade.
The news hit global stock markets, taking Europe’s STOXX 600 index to a two-week low. The index pared its losses but as of 1112 GMT, it was still down 0.8 per cent.
US stocks were also set to open lower with Nasdaq futures having fallen more than 1 per cent in earlier trade.
US 10-year Treasury yields were down 3 basis points.
The Sensex tanked more than 1,000 points during intra-day trades, with investor wealth taking a hit of nearly Rs 3.48 lakh crore.
The rupee dipped 45 paise to settle at 82.67 against the dollar amid weak domestic equities and unabated foreign fund outflows.
The domestic unit opened at 82.38 against the dollar and touched a peak of 82.37 during intra-day.
New York Times News Service; With inputs from our Mumbai bureau