The decision by Fitch Ratings to downgrade America’s long-term foreign-currency-issuer default rating this week should be a “wake-up call.”
Here’s Why
On Tuesday, a rating agency downgraded U.S. credit for the second time in the nation’s history, sounding an alarm with implications for the economy and everyday people’s finances if U.S. debt continues to grow.
This elicited swift condemnation from Biden administration officials who said they “strongly disagree” with the change.
Fitch Ratings downgraded the country’s Long-Term Foreign-Currency Issuer Default Rating from top-rated “AAA” to “AA+” in a move that could lead to higher interest rates and borrowing costs.
It follows the federal government narrowly avoiding a default on its debt earlier this summer and several weeks ahead of a possible shutdown if a politically-divided Congress disagrees on spending for the next fiscal year.
“Historic Failure”
Sen. Joe Manchin (D-W.Va.), who has railed against the nation’s record-high debt, on Thursday called Fitch Ratings’ downgrade of the U.S. credit rating from AAA to AA+ a “historic failure of leadership by both political parties and the executive branch.”
He blamed the nation’s latest credit downgrade on the inability of Republicans and Democrats in Congress and President Biden to make significant progress in addressing the nation’s $32 trillion debt.
“The credit agency specifically cited the decline in governance, erosion of cooperation in the federal government and ballooning national debt when making the determination to lower our credit rating,” he said.
“This is a stark warning that cannot be ignored. We must act now to fully fund the government and address our national debt before we wake up to a future where America’s superpower status is in jeopardy and we have lost the confidence of our allies around the world.”
What Next?
Since yearly spending by the federal government exceeds tax revenue, the U.S. has accrued tens of trillions of dollars in debt, requiring the country to make ongoing payments so that it doesn’t default on outstanding loans.
The credit downgrade is one in a sequence of developments that could eventually lead investors to believe the U.S. is less likely to pay off its debt. In that case, investors would demand a higher interest rate for loans and, in turn, U.S. debt would become more costly.
The federal government could then lose some of its ability to spend on social welfare programs and projects that help stimulate the economy, which in the long term could slow economic growth and leave the nation vulnerable to financial setbacks, Shai Akabas, director of economic policy at the Bipartisan Policy Center, told ABC News.
If the U.S. debt grows and the government struggles to address it, consumers could face higher interest rates for loans since the nation and its borrowers would be deemed less trustworthy. That would mean higher costs for borrowing everything from credit cards to mortgages to cars.
Hearst Communications owns Fitch Ratings. According to online sources, Hearst owns newspapers, magazines, television channels, and television stations, including the San Francisco Chronicle, the Houston Chronicle, Cosmopolitan, and Esquire. It holds 50% of the A&E Networks cable network group and 20% of the sports cable network group ESPN, both in partnership with The Walt Disney Company.[4] It also used to own 50% of Complex Networks in partnership with Verizon.
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