Fitch

Xinhua News Agency, Washington, August 2 (International Observation) The “cancer” of the U.S. debt crisis is hard to get rid of. The U.S. credit rating has been downgraded

Xinhua News Agency reporter Xiong Maoling and Shi Chun

On the 1st, the international rating agency Fitch downgraded the US long-term foreign currency issuer default rating from AAA to AA+. International observers believe that the rating downgrade shows that the growth of US debt is unsustainable, and its government governance and fiscal management capabilities have been questioned. At the same time, persistently high debt may crowd out public investment and inhibit the development of the US economy.

This is the building of the Treasury Department taken on January 20 in Washington, the capital of the United States. (Photographed by Xinhua News Agency reporter Liu Jie)

Fitch issued a statement on the same day, saying that the downgrade of the US credit rating was mainly due to the high and increasing debt burden of the US government, and the financial situation is expected to continue to deteriorate in the next three years. Over the past 20 years, the United States has experienced repeated debt-ceiling political deadlocks, often with resolutions delayed until the last minute, undermining people’s confidence in the ability of the United States to manage its finances.

In May of this year, when the two parties in the US Congress were “extreme game” on the debt ceiling issue, Fitch put the US long-term foreign currency issuer default rating on the negative watch list. The agency warned that the two parties in the U.S. Congress adopted brinkmanship on the issue of the debt ceiling, and the government failed to effectively respond to medium-term fiscal challenges, resulting in rising budget deficits and increasing debt burdens, all of which indicate that the U.S. credit is facing a downward risk. According to the latest statement, Fitch removed the United States from the negative watch list after downgrading its rating, with a “stable” rating outlook.

U.S. stock futures opened lower after Fitch downgraded the U.S. credit rating, with Dow futures down about 100 points. U.S. Treasury Secretary Yellen responded that she “strongly” disagreed with Fitch’s decision.

However, Maya McGuinias, chair of the Federal Budget Accountability Committee, an independent U.S. research institute, said the downgrade should be a wake-up call that the U.S. needs to get fiscal and political order back on track. “As noted by Fitch, the U.S. faces a number of significant fiscal challenges with high national debt, rapidly rising deficits, and interest costs eating into increasing amounts of fiscal revenue.”

This is the Capitol building taken in Washington DC on January 19. (Published by Xinhua News Agency, photo by Shen Ting)

According to data from the U.S. Department of the Treasury, in the first nine months of this fiscal year (October 2022 to June 2023), the U.S. government’s fiscal deficit was approximately 1.4 trillion U.S. dollars, nearly three times that of the same period last year. The current US public debt has exceeded 32.6 trillion US dollars, which is equivalent to nearly 100,000 US dollars in debt for each American. According to reports, the time for the US debt to exceed US$32 trillion is nine years ahead of the forecast before the new crown epidemic.

Luke Tilley, chief economist at Wilmington Trust in the United States, pointed out that while banks and investors are unlikely to suddenly abandon U.S. Treasuries as a safe-haven asset because of the action of a rating agency, similar moves will gradually eat into the global economy. Financial market confidence in the creditworthiness of the U.S. government.

Michael Peterson, CEO of the Peter Peterson Foundation in the United States, previously stated that the continuous accumulation of federal government debt is the result of repeated “irresponsibility” by the Democratic and Republican parties in Congress on fiscal issues. U.S. fiscal expenditures had already embarked on an unsustainable path before the outbreak of the new crown epidemic. Structural drivers already existed, and the epidemic has rapidly increased the fiscal challenges in the United States.

Desmond Rahman, an economist at the American Enterprise Institute, told Xinhua that high budget deficits did not arouse the vigilance of many economists in the past because they believed that low interest rates would last for a long time. A recent Fed rate hike would have a “substantial impact” on U.S. public finances due to high levels of U.S. public debt. The Federal Reserve has raised interest rates 11 times since entering the current round of interest rate hike cycle in March 2022, with a cumulative rate hike of 525 basis points.

This is the White House photographed on January 20 in Washington, the capital of the United States. (Photographed by Xinhua News Agency reporter Liu Jie)

The U.S. Congressional Budget Office predicts that federal government interest payments will reach $663 billion in 2023, and further soar to $1.4 trillion in 2033. The total net interest in the next 10 years will reach $10.6 trillion. Between 2007 and 2020, interest payments remained at around 1.5% of U.S. gross domestic product (GDP); by 2029, interest payments will reach 3.2% of GDP.

Longer-term, rising interest costs are a “significant challenge,” according to Peterson. Rising interest costs and rising debt burdens could hold back economic development by diverting vital public investment that could otherwise be used to fuel future economic growth.

Fitch predicts that the ratio of US government debt to GDP will rise to 118.4% by 2025, much higher than the level of about 100% before the epidemic. In comparison, the median debt-to-GDP ratio of AAA-rated countries by Fitch is 39.3 percent, and that of AA-rated countries is 44.7 percent.

Fitch’s long-term forecast shows that the US government’s debt-to-GDP ratio will rise further, which will increase the vulnerability of the US fiscal position to future economic shocks.

Fitch also forecasts that tightening credit conditions, weaker business investment and slower consumption will lead to a “moderate recession” in the U.S. economy in the fourth quarter of 2023 and the first quarter of 2024. The agency predicts that the real GDP growth rate of the United States will slow down from 2.1% in 2022 to 1.2% this year, and the growth rate in 2024 will be only 0.5%.

[Responsible editor: Li Weibin]

2023-08-02 16:00:00
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