Fitch downgrades US debt on debt ceiling drama and governance worries

By Elisabeth Buchwald, CNN

(CNN) — Fitch Ratings downgraded its US debt rating on Tuesday from the highest AAA rating to AA+, citing “a steady deterioration in standards of governance.”

The downgrade comes after lawmakers negotiated up until the last minute on a debt ceiling deal earlier this year, risking the nation’s first default. But the January 6 insurrection was also a major contributing factor.

In a meeting with Biden administration officials, representatives from Fitch Ratings repeatedly highlighted the January 6th insurrection as a significant concern as it relates to US governance, a person familiar with the matter told CNN. The credit agency did not mention the insurrection in their full report on the downgrade.

Fitch did not immediately respond to CNN’s request for comment.

US debt has long been considered the safest of safe havens, but Tuesday’s rating cut suggests it has lost some of its luster. The downgrade has potential reverberations on everything from the mortgage rates Americans pay on their homes to contracts carried out all across the world.

The move could cause investors to sell US Treasuries, leading to a spike in yields that serve as references for interest rates on a variety of loans.

Explaining its rationale for the downgrade, Fitch pointed to “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.”

Fitch said the decision wasn’t just prompted by the latest debt ceiling standoff but rather “a steady deterioration in standards of governance over the last 20 years” regarding “fiscal and debt matters.”

Democrats reaction to the downgrade

Biden administration officials objected to the ratings cut.

“I strongly disagree with Fitch Ratings’ decision,” said Treasury Secretary Janet Yellen in a statement on Tuesday. “The change by Fitch Ratings announced today is arbitrary and based on outdated data.”

White House press Secretary Karine Jean-Pierre said in a statement that “we strongly disagree with this decision,” and cited similar concerns about Fitch’s modeling.

“And it’s clear that extremism by Republican officials—from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations—is a continued threat to our economy,” she added.

Senate Majority Leader Chuck Schumer blamed House Republicans for the downgrade, saying in statement that their “reckless brinksmanship and flirtation with default has negative consequences for the country.”

Spokespeople for House Speaker Kevin McCarthy did not immediately return requests for comment on Fitch’s downgrade.

The last time the US debt was downgraded by another major credit rating agency, S&P, came in 2011. In both cases, the limit was raised only after protracted negotiations.

The S&P move had tremendous market impacts, leading to steep stock market declines and rising bond yields.

Until 2011, US debt had carried a perfect credit rating since Moody’s Investors Service first assigned the United States a AAA rating in 1917. The country’s new Fitch rating puts it on par with Austria and Finland but below Switzerland and Germany.

S&P has maintained its AA+ rating on the US after the 2011 downgrade while Moody’s has kept its AAA rating.

An administration official on Tuesday declined to speculate about whether other major credit rating agencies would follow Fitch’s lead but noted that Fitch was the only one to have the US on a negative watch.

Fitch also did not immediately respond to CNN’s request for comment on Biden administration official accusations that its modeling is flawed

Markets on Tuesday were by and large unfazed by Fitch’s downgrade in after-hours trading.

Dow Jones Industrial Average, S&P 500 and Nasdaq-100 futures were all down by less than 1% following the announcement.

Former Treasury Secretary Larry Summers said Fitch’s decision is “bizarre and inept,” particularly as the US economy “looks stronger than expected,” he said in a post on Twitter, now formally known as X.

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Sam Fossum, Allison Morrow, Tami Luhby and Matt Egan contributed to this report.