Rioters loyal to President Donald Trump scale the west wall of the the U.S. Capitol, Jan. 6, 2021. (AP/Jose Luis Magana)
A divided United States does not inspire confidence in the country’s ability to pay its debt, according to Fitch Ratings, which downgraded the U.S. credit rating due to fiscal concerns, an erosion of governance, and political polarization reflected in part by the Jan. 6 insurrection.
Fitch announced it had downgraded the U.S. long-term foreign-currency issuer default rating (IDR) from the highest AAA rating to AA+. In a press release, Fitch cited a deterioration of governance relative to rated U.S. peers over the last 20 years that it said has manifested in repeated debt limit standoffs and last-minute resolutions.
Here are five things to know.
A major sell-off followed, led by the tech sector. The Dow closed 348 points — 1 percent lower — in Wednesday trading. The S&P 500 fell 1.4 percent and the Nasdaq dropped 2.2 percent — its worst performance since February, CNN reported. Massive tech stocks such as Amazon, Meta, Microsoft, Tesla, Nvidia and Apple led market declines. The tech sector is especially sensitive to interest rate changes because it is so forward-facing.
Mortgage rates rose Wednesday after Fitch downgraded U.S. debt.
The yield on 10-year Treasuries climbed rose to its highest since November and the fixed rate for a 30-year mortgage tends to follow the yield, CNN reported.
“What is happening related to the downgrade of the US debt has really bumped up some of the borrowing costs,” said Lawrence Yun, chief economist at the National Association of Realtors.
However, Yun questioned the seriousness of the announcement.
There is rarely real panic about US debt, Yun said. “Even if it is a delay of a few days or a few weeks, everyone knows the U.S. government will pay back the people who purchased those government bonds.”
President Joe Biden, who has pushed his Bidenomics agenda in the face of economic resilience, was privately frustrated over the Fitch decision, according to people familiar with the matter. Progress on jobs, real wages and bringing down inflation are going in the right direction and typically matter more to voters than a Wall Street credit grader’s score, Bloomberg reported. “Still, any indicator pointing to shortfalls in stewardship of the economy could damage public perceptions of Biden as he seeks reelection.”
The lost AAA rating, held by the U.S. for decades, is the gold standard in the financial world, conferring the safest possible investment. It reflected the U.S.’s status as the world’s biggest and safest economy, one that has never defaulted on its debt obligations, Rafael Nam wrote for NPR.
Credit ratings are an important part of the financial system but the agencies that issue them — dominated by S&P Global Ratings, Moody’s and Fitch — have been the target of criticism. During the 2008 Global Financial Crisis, many subprime mortgage bonds that went bust had been highly rated by the ratings agencies, exposing flaws in the system.
“The main thing to know is that credit ratings are subjective. They’re an assessment by an agency — and opinions can differ,” Nam wrote.
JPMorgan CEO Jamie Dimon called the Fitch Ratings U.S. downgrade “ridiculous” but said it “doesn’t really matter.”
It’s the market, not rating agencies, that determines borrowing costs, Dimon told CNBC. Still, it is “ridiculous” that other countries are rated higher than the U.S. when they depend on the stability created by the U.S. and its military, Dimon said.
Fitch pointed to the Jan. 6 riot as a reason for the downgrade. There has been a “steady deterioration in governance over the last couple of decades,” highlighted in part by Jan. 6, Richard Francis, co-head of the Americas Sovereign Ratings at Fitch, told CNBC.
The White House “strongly” disagreed with the decision to downgrade, saying that it “defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” press secretary Karine Jean-Pierre said.
“And it’s clear that extremism by Republican officials — from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations — is a continued threat to our economy,” Jean-Pierre said.
Kevin Munoz, a Biden campaign spokesman, blamed Donald Trump for urging Republicans this year to let the U.S. default on its debt during an impasse with Democrats over spending cuts.
“Donald Trump oversaw the loss of millions of American jobs, and ballooned the deficit with the disastrous tax cuts for the wealthy and big corporations,” Munoz said. “This Trump downgrade is a direct result of an extreme MAGA Republican agenda defined by chaos, callousness, and recklessness that Americans continue to reject.”
Republicans responded to the Fitch downgrade by criticizing government spending and deficits under the Biden adminsitration.
The House Freedom Caucus said the Biden administration should have acted sooner to compromise with conservative lawmakers on raising the debt ceiling. “This is a wake-up call to get our fiscal house in order before it’s too late,” said House Budget Chair Jodey Arrington (R-Texas).
