Fitch Ratings revised the outlook on the United States’ triple-A rating to negative from stable on Friday, citing eroding credit strength, including a growing deficit to finance stimulus to combat fallout from the coronavirus pandemic.
The credit rating agency also said the future direction of US fiscal policy depends in part on the November election for president and the resulting makeup of Congress, cautioning there is a risk policy gridlock could continue.
Debt and deficits, which were already rising before the pandemic, have started to erode the country’s traditional credit strengths, Fitch said in a report.
“Financing flexibility, assisted by Federal Reserve intervention to restore liquidity to financial markets, does not entirely dispel risks to medium-term debt sustainability, and there is a growing risk that US policymakers will not consolidate public finances sufficiently to stabilize public debt after the pandemic shock has passed,” Fitch said.
It added that US government debt, the highest among any AAA-rated sovereign nations heading into the crisis, was expected to exceed 130% of gross domestic product by 2021.
Mike Englund, chief economist at Action Economics, predicted markets would react negatively to the move.
“It reduces confidence in US financial markets and it does prompt some entities to want to sell Treasuries, so you may see some back up in yields even though no one is really looking for US defaults,” he said.
Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California, said investors would probably not react strongly to Fitch’s announcement.
“If people really had jitters about US debt, you wouldn’t see bond yields where they are,” Merk said. “It’s noteworthy, but with everything happening in the US and other countries, the quality of balance sheets is deteriorating, and that is not a surprise.”