Prof. ST Hsieh
Director, US-China Energy Industry Forum
August 1, 2023
It is not news that the US faces significant domestic challenges, but it is only the second time that the US credit rating has been downgraded by a notch. Quantitively, the downgrade is not significant:
- AAA: the best quality companies, reliable and stable
- AA: quality companies, a bit higher risk than AAA
More damaging is that Fitch openly documented the reasons for downgrading:
- Eroding governance in the U.S. over the past two decades.
- Expected fiscal deterioration over the next three years.
Of course, the Biden Administration objected to Fitch’s downgrading, Yellen issued a rebuke immediately. However, there is no denial that governance in the US over eroded in the past two decades. Further, it was not Biden’s responsibility.
However, Biden administration should seriously defend the “expected fiscal deterioration over the three years. Specifically, Biden’s re-election campaign strategy is based on the success of Bidenomics.
Unfortunately, Fitch also pointed out that, under Biden’s watch, confidence in fiscal management has also eroded. If the US faces another federal government shut down this fall, further downgrading may be inevitable.
Fitch slashes U.S. credit ratings to AA+ from AAA, points to ‘erosion’ of governance
Published: Aug. 1, 2023 at 5:46 p.m. ET
Fitch said eroding governance in the U.S. over the past two decades was among the factors for its downgrade, in a Tuesday evening statement. It also said it expected the general government deficit to climb to 6.3% of gross domestic product in 2023, from 3.7% in 2022, on weaker federal revenues, new spending initiatives and a higher interest burden.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” Fitch said.
“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”
Fitch warned in May that it might cut the U.S.’s AAA ratings as the latest debt-ceiling fight was dragging on for months without a resolution.
Borrowing costs have climbed as the Treasury Department has unleashed a flood of Treasury issuance since its June debt-ceiling deal to restock it coffers. The 1-month Treasury yield was at 5.36% on Tuesday, while auctions of other Treasury bills maturing in one year often kick off yields north of 5%.
When they come back next month, lawmakers have a monumental task ahead of them,
No pressure: When lawmakers are back on Capitol Hill, they’ll have roughly three weeks until the Sept. 30 deadline to pass a federal budget.
What happens if they don’t? If lawmakers can’t hammer out 11 of 12 separate spending bills, the country will face a government shutdown. Lawmakers could pass what’s called a “continuing resolution,” which could fund the government until an agreed upon date. But that’s not a permanent solution.
It’s not clear whether lawmakers can reach a compromise in time. The Republican-controlled House and the Democratic-controlled Senate will have to reach agreements on a slew of spending fights. But some members of the conservative flank of the House, the House Freedom Caucus, don’t seem concerned about a shutdown.
“We should not fear a government shutdown,” Rep. Bob Good, R-Va., a member of the Freedom Caucus said at a press conference last week. “Most of the American people won’t even miss if the government is shut down temporarily.”
Every government shutdown is slightly different, but one thing is for sure: Americans across the country could quickly face the consequences.