To assess the solvency of States, communities or companies, the three main rating agencies in the world -S&P Global, Fitch and Moody’s- use scales of letters or grades, ranging from AAA, considered above any risk, to C or D, which flag potential refund defaults.
The measurements are carried out through parameters of economic growth, indebtedness, deficit, expenses and fiscal income, among others. The diagnosis serves as a guide for investors.
This means that the lower the assigned note, the higher the interest that investors will ask to lend money to a State or a company, because their debt will be considered more risky.
Reasons to change rating
Fitch’s arguments are compelling, even though Moody’s did not endorse them.
The head of Fitch for the Americas, Richard Francis, indicated that “among the important elements for us is the fact that the governments, from both camps, Republicans and Democrats, have not been able to find lasting solutions to the growing fiscal problems of the United States”.
“We have observed a fairly constant deterioration in governance over the past few decades. This is illustrated by “the always tightrope resolution of the debt ceiling issue,” stressed Francis, who also anticipates that the United States budget situation is not pointing to improve and forecast large and persistent deficits in the next two years.
“We expect a rise in the (fiscal) deficit in the next three years,” he said.
The implications of this measure, although the Joe Biden government denies it, are transcendental. Wall Street acknowledged receipt in the two sessions following the decision, after a streak of green closings.
Some analysts, to also downplay the issue, stated that the New York Stock Exchange needed a correction, but the matter is transferred to investors and especially foreigners.
On August 2, the main Wall Street indices fell. The Dow Jones industrial lost 0.98%, the Nasdaq technology lost a significant -2.17% and the S&P 500 -representing the largest 500 companies- fell -1.38%.
Higher risk — after Fitch’s announcement — and rising Treasury rates weighed on stocks, particularly big-caps in the tech sector.
Nvidia skidded -4.81%, Microsoft lost -2.63%, Meta -2.60% and Amazon -2.64%.
Fitch upholds its decision
The reduction of the US debt note increases the risk of the loans and consequently the interests, which slows down the flow of capital and decreases the confidence of those interested in putting their money in motion.
The Federal Reserve was forced since March of the previous year to a succession of interest rate hikes (11 in total), with only a pause last June, given the persistence of high inflation.
The ten-year Treasury yield rose on August 2 to 4.07% from 4.04% the day before, but these values are already very high in the stock market, compared to 2019 and 2020.
Faced with the reactions of the White House, Fitch responded with strong arguments, after depriving the United States of its perfect AAA debt rating due to the deterioration of governance in the country.
The credit rating agency’s decision to downgrade the US debt rating to AA+ is “unjustified,” said Treasury Secretary Janet Yellen.
According to Yellen, “the agency’s assessment does not correspond to the current vigor of the world’s largest economy.” Apparently, the senior official does not recognize her mistakes or the critical economic situation and indebtedness caused by the Biden administration’s policies in almost three years in office.
data and reality
The statistics reveal the truth: record inflation in the last five decades for almost three years and which rose to 9.1% in June 2022 with unsustainable prices for the pocket of consumers; an (unrecognized) mortgage crisis with a drop in sales for more than 13 months (11 of them consecutive), a banking crisis that, although it remains silent, has not stopped; the cost of hundreds of billions of additional dollars due to the open crisis on the southern border; an unprecedented contraction for 10 months of manufacturing activity together with a trade deficit in 2022 of 948.100 million dollars, an increase of 12.2% compared to the previous year that added a record in the history of the country.
The US debt that is close to 32 trillion dollars, with a war on its back in Ukraine and an extensive list of organizations and governments, which now receive financing from the Biden government, have created the worst economic conditions for the nation in tens of years. Not even when the mortgage recession of 2007-2009 did Americans see a degradation so widespread economic development in the US.
The price of gasoline is on the rise again (with an average increase of almost 4 dollars), less than 10 weeks before the start of the winter season, when traditionally shoots the value of fuels due to an increase in consumption.
In June and July of last year, the national average price for a regular gallon of gasoline exceeded $5, and in some states drivers paid more than $7.
The reduction of almost three million barrels per day in the last 10 months by the Organization of Petroleum Producing and Exporting Countries (OPEC) and (OPEC+) has caused an increase in the value of crude oil worldwide.
The Biden government eliminated the energy independence of the US and lowered it from the podium of the world’s leading oil exporter in 2019, above Saudi Arabia, which got the government of Donald Trump, the 45th president. Therefore, now the Americans directly depend the instability of fuel prices and the financial policies outlined by the oil company worldwide.
Faced with this whole situation, the Fitch agency warned at the end of May that it could revise the triple A rating of the US debt downwards, if it raised the country’s debt limit to avoid a default.
“The downgrade (of the note) of the United States reflects the fiscal deterioration expected in the next three years” and the “erosion of governance” after “repeated impasses on the debt limit and last minute resolutions” (to avoid a non-payment), the report explained.
Fitch also took aim at “a high and growing public debt burden” in the United States.
In another section of its summary, the agency concluded that “the US government does not have a medium-term fiscal framework, contrary to most of its peers, and it has a complex budget process. These factors, as well as various “shocks” changes and new spending initiatives, have contributed to successive increases in debt over the past decade”.
