US Credit Rating Downgrade

#1
#4
#4
- from Fitch

KEY RATING DRIVERS


Ratings Downgrade: The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.

Erosion of Governance: 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. 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. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.

Rising General Government Deficits: We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. Additionally, state and local governments are expected to run an overall deficit of 0.6% of GDP this year after running a small surplus of 0.2% of GDP in 2022. Cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook, with cumulative savings of USD1.5 trillion (3.9% of GDP) by 2033 according to the Congressional Budget Office. The near-term impact of the Act is estimated at USD70 billion (0.3% of GDP) in 2024 and USD112 billion (0.4% of GDP) in 2025. Fitch does not expect any further substantive fiscal consolidation measures ahead of the November 2024 elections.

Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025 (in line with the historical 20-year average). The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the 'AA' median and 1% for the 'AAA' median) due to the higher debt level as well as sustained higher interest rates compared with pre-pandemic levels.

General Government Debt to Rise: Lower deficits and high nominal GDP growth reduced the debt-to-GDP ratio over the last two years from the pandemic high of 122.3% in 2020; however, at 112.9% this year it is still well above the pre-pandemic 2019 level of 100.1%. The GG debt-to-GDP ratio is projected to rise over the forecast period, reaching 118.4% by 2025. The debt ratio is over two-and-a-half times higher than the 'AAA' median of 39.3% of GDP and 'AA' median of 44.7% of GDP. Fitch's longer-term projections forecast additional debt/GDP rises, increasing the vulnerability of the U.S. fiscal position to future economic shocks.

Medium-term Fiscal Challenges Unaddressed: Over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms. The CBO projects that interest costs will double by 2033 to 3.6% of GDP. The CBO also estimates a rise in mandatory spending on Medicare and social security by 1.5% of GDP over the same period. The CBO projects that the Social Security fund will be depleted by 2033 and the Hospital Insurance Trust Fund (used to pay for benefits under Medicare Part A) will be depleted by 2035 under current laws, posing additional challenges for the fiscal trajectory unless timely corrective measures are implemented. Additionally, the 2017 tax cuts are set to expire in 2025, but there is likely to be political pressure to make these permanent as has been the case in the past, resulting in higher deficit projections.

Exceptional Strengths Support Ratings: Several structural strengths underpin the United States' ratings. These include its large, advanced, well-diversified and high-income economy, supported by a dynamic business environment. Critically, the U.S. dollar is the world's preeminent reserve currency, which gives the government extraordinary financing flexibility.

Economy to Slip into Recession: Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the U.S. economy into a mild recession in 4Q23 and 1Q24, according to Fitch projections. The agency sees U.S. annual real GDP growth slowing to 1.2% this year from 2.1% in 2022 and overall growth of just 0.5% in 2024. Job vacancies remain higher and the labor participation rate is still lower (by 1 pp) than pre-pandemic levels, which could negatively affect medium-term potential growth.

Fed Tightening: The Fed raised interest rates by 25bp in March, May and July 2023. Fitch expects one further hike to 5.5% to 5.75% by September. The resilience of the economy and the labor market are complicating the Fed's goal of bringing inflation towards its 2% target. While headline inflation fell to 3% in June, core PCE inflation, the Fed's key price index, remained stubbornly high at 4.1% yoy. This will likely preclude cuts in the Federal Funds Rate until March 2024. Additionally, the Fed is continuing to reduce its holdings of mortgage backed-securities and U.S. Treasuries, which is further tightening financial conditions. Since January, these assets on the Fed balance sheet have fallen by over USD500 billion as of end-July 2023.


ESG - Governance: The U.S. has an ESG Relevance Score (RS) of '5' for Political Stability and Rights and '5[+]' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch's proprietary Sovereign Rating Model. The U.S. has a high WBGI ranking at 79, reflecting its well-established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.
 
#7
#7
- from Fitch

KEY RATING DRIVERS


Ratings Downgrade: The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.

Erosion of Governance: 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. 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. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.

Rising General Government Deficits: We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. Additionally, state and local governments are expected to run an overall deficit of 0.6% of GDP this year after running a small surplus of 0.2% of GDP in 2022. Cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook, with cumulative savings of USD1.5 trillion (3.9% of GDP) by 2033 according to the Congressional Budget Office. The near-term impact of the Act is estimated at USD70 billion (0.3% of GDP) in 2024 and USD112 billion (0.4% of GDP) in 2025. Fitch does not expect any further substantive fiscal consolidation measures ahead of the November 2024 elections.

Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025 (in line with the historical 20-year average). The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the 'AA' median and 1% for the 'AAA' median) due to the higher debt level as well as sustained higher interest rates compared with pre-pandemic levels.

General Government Debt to Rise: Lower deficits and high nominal GDP growth reduced the debt-to-GDP ratio over the last two years from the pandemic high of 122.3% in 2020; however, at 112.9% this year it is still well above the pre-pandemic 2019 level of 100.1%. The GG debt-to-GDP ratio is projected to rise over the forecast period, reaching 118.4% by 2025. The debt ratio is over two-and-a-half times higher than the 'AAA' median of 39.3% of GDP and 'AA' median of 44.7% of GDP. Fitch's longer-term projections forecast additional debt/GDP rises, increasing the vulnerability of the U.S. fiscal position to future economic shocks.

Medium-term Fiscal Challenges Unaddressed: Over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms. The CBO projects that interest costs will double by 2033 to 3.6% of GDP. The CBO also estimates a rise in mandatory spending on Medicare and social security by 1.5% of GDP over the same period. The CBO projects that the Social Security fund will be depleted by 2033 and the Hospital Insurance Trust Fund (used to pay for benefits under Medicare Part A) will be depleted by 2035 under current laws, posing additional challenges for the fiscal trajectory unless timely corrective measures are implemented. Additionally, the 2017 tax cuts are set to expire in 2025, but there is likely to be political pressure to make these permanent as has been the case in the past, resulting in higher deficit projections.

Exceptional Strengths Support Ratings: Several structural strengths underpin the United States' ratings. These include its large, advanced, well-diversified and high-income economy, supported by a dynamic business environment. Critically, the U.S. dollar is the world's preeminent reserve currency, which gives the government extraordinary financing flexibility.

Economy to Slip into Recession: Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the U.S. economy into a mild recession in 4Q23 and 1Q24, according to Fitch projections. The agency sees U.S. annual real GDP growth slowing to 1.2% this year from 2.1% in 2022 and overall growth of just 0.5% in 2024. Job vacancies remain higher and the labor participation rate is still lower (by 1 pp) than pre-pandemic levels, which could negatively affect medium-term potential growth.

Fed Tightening: The Fed raised interest rates by 25bp in March, May and July 2023. Fitch expects one further hike to 5.5% to 5.75% by September. The resilience of the economy and the labor market are complicating the Fed's goal of bringing inflation towards its 2% target. While headline inflation fell to 3% in June, core PCE inflation, the Fed's key price index, remained stubbornly high at 4.1% yoy. This will likely preclude cuts in the Federal Funds Rate until March 2024. Additionally, the Fed is continuing to reduce its holdings of mortgage backed-securities and U.S. Treasuries, which is further tightening financial conditions. Since January, these assets on the Fed balance sheet have fallen by over USD500 billion as of end-July 2023.


ESG - Governance: The U.S. has an ESG Relevance Score (RS) of '5' for Political Stability and Rights and '5[+]' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch's proprietary Sovereign Rating Model. The U.S. has a high WBGI ranking at 79, reflecting its well-established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.
Sure. If you wanna look at facts and key drivers.

But what about “Orange man bad” and “LOL @ MTG” and “Der der da Freeeedom caucus!! ”.

Let’s not forget about those variables.
 
#11
#11
Hey, just want to keep everyone honest. Kinda disingenuous to bitch about or point fingers concerning our credit rating all the while supporting continued borrowing for Ukraine.

The only thing Dems and Reps in Congress can ever agree on is spending money for war in countries across the world.
 
#12
#12
They are, how many billions have they authorized for Ukraine at the WHs request? And now that money is just going to cost us taxpayers more.
Pretty sure I've read somewhere they have already run up another $1T since the debt limit was raised.
 
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#13
#13
Hey, just want to keep everyone honest. Kinda disingenuous to bitch about or point fingers concerning our credit rating all the while supporting continued borrowing for Ukraine.
You should probably poke somewhere else then homeboy. If we had no intention of providing promises to their security we shouldnt have given them then. Like I’ve said I’d have preferred we stayed out of it in 1994 but since you’re all about keeping everyone honest when you provide promises of security you keep them.
 
#15
#15
You should probably poke somewhere else then homeboy. If we had no intention of providing promises to their security we sounding have given them then. Like I’ve said I’d have preferred we stayed out of it in 1994 but since you’re all about keeping everyone honest when you provide promises of security you keep them.

When were nuclear weapons used?

The Russian Federation, the United Kingdom of Great Britain and Northern Ireland and the United States of America reaffirm their commitment to seek immediate United Nations Security Council action to provide assistance to Ukraine, as a non-nuclear-weapon State party to the Treaty on the Non-Proliferation of Nuclear Weapons, if Ukraine should become a victim of an act of aggression or an object of a threat of aggression in which nuclear weapons are used.

Our assurance did not provide any detail on how we would respond and did not guarantee monetary or material assistance.
 
#16
#16
When were nuclear weapons used?



Our assurance did not provide any detail on how we would respond and did not guarantee monetary or material assistance.
Back on assurance again. I’ve heard your stance and I believe you are wrong based on ALL the documents involved.

Go pull up the document in question. Assurance in the English version is in the first sentence in the header. Like the third word. Then pull up the Ukrainian and Russian language versions. Use Google translate or whatever translator you want to look up Guarantee in Russian and Ukrainian. You will find Guarantee in both of those documents. Now translate assurance from both languages. You will see there is no ambiguity assurance appears no where in the Ukrainian or Russian docs.

Slick Willy signed all three.
 
#18
#18
yeah, it had nothing to do with the rising debt, or the rising deficit. lets just blame the people who want to slow it down.
Fitch explicitly pointed to a 20 year downward trajectory of meaningful fiscal controls on spending in their analysis. I think that’s actually a tad generous.
 
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#19
#19
i-did-that-joe-biden-sticker.jpg
 
#21
#21
please explain, can't wait to hear this one


The # 1 reason for the downgrade is the increasing difficulty we have had in adjusting the debt limit. Most recently that was due to the antics of the Freedom Caucus. And they show no signs of tempering their theatrics, quite the opposite in fact.

You can theorize all you want about an alternative hypothetical universe in which we have either no or very low national debt, but that is not the reality we face.

I'm all for SANE, LEVEL HEADED people running for Congress or President on a platform of reducing the debt, with reasonable and practical solutions over time to achieve that goal. But the histrionics of Freedom Caucus types, insinuating themselves into the discussions and negotiations by the adults, is not helping anyone.
 
#22
#22
You should probably poke somewhere else then homeboy. If we had no intention of providing promises to their security we shouldnt have given them then. Like I’ve said I’d have preferred we stayed out of it in 1994 but since you’re all about keeping everyone honest when you provide promises of security you keep them.
to what end?
 
#23
#23
to what end?
I have no idea at the moment honestly. But there is bipartisan support for it to go on for the near term. In the future hopefully we will learn to mind our own damn business and not make these kinds of crazy entangling agreements (yeah I laughed when I typed that). But we made this one and it is one horribly defined commitment, hog is right in that and I’ve said it myself. I don’t see that as a valid reason to vacate it however.

I’d guess that it’s going to continue thru 2024 however and if there is a change in the WH I’d guess there will be material changes to the current levels of support since all GOP contenders have stated as much. I don’t think it will go away entirely however.

So I guess that’s a whole lot of words to say I have no damn idea 🤷‍♂️
 
#25
#25
The # 1 reason for the downgrade is the increasing difficulty we have had in adjusting the debt limit. Most recently that was due to the antics of the Freedom Caucus. And they show no signs of tempering their theatrics, quite the opposite in fact.

You can theorize all you want about an alternative hypothetical universe in which we have either no or very low national debt, but that is not the reality we face.

I'm all for SANE, LEVEL HEADED people running for Congress or President on a platform of reducing the debt, with reasonable and practical solutions over time to achieve that goal. But the histrionics of Freedom Caucus types, insinuating themselves into the discussions and negotiations by the adults, is not helping anyone.

And number 2 was rising deficits
 
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