The downgrading of US credit rating: negative implications

By Imran Khalid | Gwadar Pro Aug 8, 2023

Editor's Note: The writer is a freelance columnist on international affairs based in Karachi, Pakistan. The article reflects the author's opinions and not necessarily the views of Gwadar Pro.


Fitch Ratings downgraded its US debt rating last Tuesday from the highest AAA rating to AA+, citing “a steady deterioration in standards of governance.” This decision is reverberating across the global stage, sending ripples of concern amidst a rapidly evolving geo-economic landscape.

Though the immediate impact might be limited and transitory, the verdict from this independent rating agency has the potential to further unsettle global financial markets, exacerbating existing turmoil. Beyond the short-term repercussions, the downgrade underscores deep-rooted concerns about the US economy and governance, gradually eroding its economic dominance and the supremacy of the dollar.

As de-dollarization gains momentum, the US may have to grapple with the erosion of its traditional economic hegemony. The US Treasury is set to offer a whopping $103 billion of securities to refinance $84 billion worth of privately held Treasury bonds maturing on August 15, 2023. This surge in issuance has led to a rapid escalation in federal debt levels, contributing to Fitch Ratings' decision to downgrade the US government's credit rating from AAA to AA+. The agency's statement clarified that the downgrade reflects concerns about the expected deterioration in fiscal health over the next three years and the mounting burden of general government debt. Market watchers and experts have sounded the alarm, cautioning that the lowered rating and the substantial increase in bond issuance could fuel a potential sell-off in Treasury bonds, raising further apprehensions in an already uncertain economic climate.

The combination of these factors, exacerbated by deeper issues within the US economy and governance, threatens to erode the US's economic dominance and dollar hegemony, as the process of de-dollarization gains momentum. Concurrently, Washington's reckless policymaking, both domestically and internationally, has inflicted substantial damage on other economies, especially those in the developing world.

Beyond the US' fiscal challenges, Fitch delivered a scathing critique of the US's governance, spanning the past two decades. The agency highlighted a continuous decline in governance standards, particularly concerning fiscal and debt issues. The repeated political standoffs over the debt limit, coupled with last-minute resolutions, have shattered confidence in fiscal management. Unlike its counterparts, the US government lacks a medium-term fiscal framework and contends with a convoluted budgeting process, further compounding the concerns raised by Fitch about the erosion of effective governance. Given the prevailing development trajectory, the prospect of the US reducing its debt seems virtually improbable. Consequently, any further borrowing would necessitate robust economic growth.

Fitch's analysis aligns with this trend, revealing that the current state of the US economy does not bode well for its future solvency. With the US showing fiscal irresponsibility and reluctance to pursue necessary reforms, the burden of debt is bound to escalate, putting additional strain on its already precarious governance situation. Data from the US Treasury Department reveals a startling fiscal deficit of $1.4 trillion in the first nine months of this fiscal year, almost triple the previous year's level. With the US public debt surpassing a staggering $32.6 trillion, the per capita debt burden on American citizens now amounts to nearly $100,000. Adding to the concern, all four major holders of US debt reduced their holdings in May.

Despite a June agreement to suspend the US debt limit until January 2025, frequent political standoffs and last-minute resolutions have eroded trust in fiscal management, according to Fitch Ratings. These financial indicators point to a precarious situation of the US economy. The looming US debt crisis threatens to have enduring repercussions on the country's economy, potentially prompting more international agencies to downgrade its ratings. As interest rates soar, businesses will face escalated financing costs, leading to adverse effects on investment and consumption. The US' mishandling of its dollar hegemony, combined with the Federal Reserve's large-scale quantitative easing followed by abrupt interest rate hikes, has dealt a severe blow to developing countries, exacerbating their debt burdens. Moody's might be next in line to downgrade the US credit ratings. Tighter credit conditions, dwindling business investments, and a slowdown in consumption could propel the US economy into a mild recession during the fourth quarter of 2023 and the first quarter of 2024.

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