Maybe Fitch Had a Point After All?
The reaction to Fitch Ratings’ recent downgrading of US government debt was more revealing than the announcement itself. Citing concerns about America’s long-term fiscal position and the risk that Washington’s political dysfunction could make matters worse, the company marked US debt down from AAA to AA+. The move was roundly attacked as “strange” and “completely absurd.” In an official response, Treasury Secretary Janet Yellen called it “arbitrary” and “outdated.”
True, the insight conveyed by any such assessment of US government debt is minimal. Investors and analysts have all the data they need to judge for themselves the risks attached to the world’s most widely traded assets. The new rating has no material regulatory implications and is barely even registered with bond markets. In effect, Fitch was telling investors what they already knew.
If ever there was a case of protesting too much, though, the reaction to the downgrade qualifies. Yellen’s comments — claiming that the administration is “committed to fiscal sustainability” — veered into outright complacency. Her reassurance should cause more anxiety not less, because the issues that Fitch is pointing to are real: By 2025, the company points out, the US budget deficit will reach nearly 7% of gross domestic product, even as the country’s fiscal challenges (a rising debt-service burden, soaring health-care costs, dwindling Social Security funds) go mostly unaddressed. Changing course starts with recognizing the gravity of the problem.
Fitch’s critics say the US fiscal outlook has improved lately, leading them to ask why the downgrade is happening now. Fair enough: On Fitch’s own analysis, it should’ve happened earlier. But the underlying problem is in no way solved. The recent improvement is temporary, arising mainly from the effect of high inflation on the denominator in the ratio of debt to GDP. On current policy, this ratio is still on track to reach historically unprecedented levels. The Congressional Budget Office expects it to exceed 118% by 2033 — and to continue rising thereafter absent a major policy change. Crucially, this deterioration is happening just as Washington’s incapacity to address the issue gets ever more entrenched.