Stock market crash fears are running wild after Fitch Ratings downgraded U.S. credit in what may turn out to be the “credit event” of the decade. Indeed, Fitch lowered the country’s long-term rating from its long-maintained AAA rating to AA+ in the second-ever downgrade in U.S. history.
What does this mean for the country?
Well, according to Fitch, the “steady deterioration in standards of governance over the last 20 years” has resulted in a loss of confidence in the nation’s fiscal management.
“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.”
Reasonably so, lawmakers bickered for months ahead of the June default deadline, finally coming to a last-minute agreement in May just weeks before the country would inevitably be forced to renege on its debt payments.
Amid all the political grandstanding, many economists speculated that the hectic, disorganized nature of the country’s debt ceiling arrangement may result in a credit downgrade, even if the U.S. doesn’t actually default.
This included Fitch itself.
“If the market reaction is to call into question the role of the dollar in the future as the world’s reserve currency and the Treasury market as the world’s risk-free asset, then absolutely we could,” said James McCormack, Fitch’s Global Head of Sovereign Ratings, back in March.
Fitch also cited the country’s rising costs of programs like Social Security and Medicare as justification behind the downgrade.
Stock Market Crash Alert: Is This the ‘Credit Event’ Economists Have Feared?
Economists have already begun weighing the potential consequences of today’s “credit event.” Given the rarity of a credit downgrade in the scope of U.S. history, there are plenty of unknowns surrounding the long-term implications of a reduced credit rating.
At the very least, Treasury notes and interest rates are expected to take a hit, although most believe the Federal Reserve will still have a far outweighed effect on the cost of borrowing in the country compared to the downgrade. Some have even shrugged off the downgrade, claiming that both the effects and justification behind the downgrade are moot.
Former Treasury Secretary Larry Summers is one such naysayer. “I can’t imagine any serious credit analyst is going to give this weight,” he said.
After today’s downgrade, there are just nine countries with AAA credit ratings, including the likes of Canada, Australia and Singapore as well as a handful of European countries.
According to Kevin Muir, writer for the MacroTourist newsletter, today’s news won’t heavily affect the perception of U.S. credit on a global scale:
“Is Canada really a better credit than the United States? Or Luxembourg? […] The US is the world’s dominant power, and sure they have done some ill-advised things like wave a gun around threatening to shoot their own financial system with a default, but we all know they will eventually pay their bills.”
Fitch represents one of the three major credit raters in the U.S. alongside Moody’s and S&P Global. With today’s news, Fitch joins the likes of S&P, which lowered the country’s credit rating back in 2011 following a similar debt-limit standoff.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
