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Home » ‘Erosion of governance’ led Fitch to downgrade US credit rating

‘Erosion of governance’ led Fitch to downgrade US credit rating

by Grayson Henderson
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Donald Trump’s attempt to overturn the 2020 election and growing political polarization in the US contributed to an “erosion of governance” that led a top credit ratings agency to downgrade US debt, a senior director of the company said on Wednesday.

Fitch cut its rating on US debt on Tuesday. It was only the second time in history that a leading credit agency has downgraded US debt. The first was in 2011, when Fitch rival Standard & Poor’s cut the US’s triple-A rating after a nerve-racking fight between the Republicans and the Obama administration over the federal budget.

Richard Francis, a senior director at Fitch Ratings, told Reuters that the agency based its decision in part on a perceived deterioration in US governance, which gave it less confidence in the government’s ability to address fiscal and debt issues.

That deterioration, as well as increased polarization in the country’s political climate, was reflected in the January 6 insurrection, which the agency highlighted in discussions with the treasury. Fitch held meetings with treasury ahead of the downgrade.

“It was something that we highlighted because it just is a reflection of the deterioration in governance, it’s one of many,” he said.

“You have the debt ceiling, you have Jan 6. Clearly, if you look at polarization with both parties … the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically,” Francis told Reuters.

All the major US stock markets closed in the red on Wednesday, with the tech-heavy Nasdaq recording the largest fall, down over 2%, while the S&P fell 1.4%, and the Dow dropped 0.98%.

Stock markets in Europe and Asia were also caught in the selloff. In London, the FTSE 100 share index fell by 104 points or 1.36% to close at 7561 points, a two week-low, and its biggest one-day fall in almost four weeks. Germany’s DAX and France’s CAC both lost around 1.3%, while Japan’s Nikkei 225 fell by 2.3%.

“There is a saying that when the US sneezes, the rest of the world catches a cold. That is certainly true with how the US government’s credit rating downgrade has troubled markets globally,” said Laith Khalaf, head of investment analysis at AJ Bell.

Fitch’s rating on the US now stands at “AA+”, one notch below the top “AAA” grade.

Fitch analysts wrote: “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. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

US officials past and present were quick to criticize Fitch’s decision, which follows from another tense political battle over federal debt ceiling in May.

The White House economic adviser Jared Bernstein said the timing of Fitch’s downgrade made no sense, calling the decision bizarre and arbitrary. “Fitch seems to be punishing the cleanup crew when the guy who wrecked the room is long gone,” Bernstein said in an interview with CNBC.

Larry Summers, the former US treasury secretary, called the decision “absurd” in an interview with Bloomberg.

The comments follow criticisms by the treasury secretary, Janet Yellen. who called the decision “arbitrary, and based on outdated data”.

In its note, Fitch forecast that the US economy would go into recession in the last quarter of 2023. But some officials are now predicting that the US will escape recession, despite the Federal Reserve’s decision to aggressively raise interest rates in order to tamp down inflation.

Last week, the Fed chair, Jerome Powell, said his staff were no longer forecasting a recession. On Wednesday, Bank of America became the first major bank to drop its forecast for a recession this year.

“Recent incoming data has made us reassess our prior view that a mild recession in 2024 is the most likely outcome for the US economy,” the bank’s economists wrote in a note. “Growth in economic activity over the past three quarters has averaged 2.3%, the unemployment rate has remained near all-time lows, and wage and price pressures are moving in the right direction, albeit gradually.”

On Friday, the US will release July’s job growth figures. US employment has remained robust despite the Fed’s rate rises, and figures from ADP, the US’s largest private payroll supplier, suggest this may have held true in July.

On Wednesday, ADP announced that private employers had added 324,000 new positions in July, far higher than the 175,000 economists had been expecting.

“The economy is doing better than expected and a healthy labor market continues to support household spending,” said Nela Richardson, ADP’s chief economist. “We continue to see a slowdown in pay growth without broad-based job loss.”

Source: The Guardian

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