August 2023 – By Ryan Boyle CFP®
On August 1st, 2023, Fitch Ratings downgraded long-term US Debt Issuer Default Rating from AAA to AA+, citing concerns with political issues, a slowing economy, and several other factors for their decision. Although bipartisan efforts were made to suspend the debt ceiling to 2025, the fact that the U.S. would have defaulted had this last-minute agreement not been reached marks only one of the few factors in Fitch Ratings’ decision to issue the downgrade. Along with the last-minute decision to raise the debt ceiling, Fitch Ratings has expressed concerns revolving around the progress made towards Social Security and Medicare given the aging population (FitchRatings). Like most other larger financial institutions, Fitch is also projecting a mild recession towards the end of 2023, possibly early 2024. Their projection on the economic slowdown did impact the decision to lower their rating, but the main drivers to the downgrade were tied to the U.S. debt repayments and issues that could impact how their debt is paid.
The AAA rating is Fitch’s highest rating and is typically only reserved for entities with the lowest possibility of missing payments on their obligations. With that being said, AA+ is still one of the highest ratings that Fitch provides, and the likelihood of an entity that is rated AA+ failing to meet its debt obligations is minimal, but not the same as an entity rated AAA. However, in the case of the U.S., U.S. treasuries are backed by the full faith and credit of the government, and their commitment is backed by the government’s ability to raise funds through taxes or even print additional cash. Theoretically, the additional risk premium created due to the downgrade should call for a higher yield pertaining to U.S. treasuries, but the actual values provided will take into consideration numerous amount of other variables to determine the actual yields.
When it comes to how this impacts an individual’s daily life, the short answer is: that there’s little to no impact as of now, and the downgrade of U.S. debt is no major concern. For now, we can expect markets to get slightly rattled given the news, but this has not been the first time a credit agency has downgraded the U.S., and delayed payments on treasuries in 1979 due to technology issues (Austin, A.). In 2011, Standard & Poor’s downgraded for the same concerns revolving around the debt ceiling. These ratings are always subject to change and can be upgraded or downgraded based on current conditions. In the rare event that the U.S. does default on its debt in the future, it would be wise to pay attention to the cause of the default, over the actual default itself.
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