Fitch Downgrades U.S. Sovereign Rating to 'AA+' - Second Blow to Credit Standing

Fitch Ratings has downgraded the United States' Long-Term Foreign-Currency Issuer Default Rating to "AA+" from "AAA," making it the second time a major credit-rating agency has taken such action against the country's sovereign rating. The downgrade is attributed to expected fiscal deterioration over the next three years, a growing general government debt burden, and a decline in governance relative to 'AA' and 'AAA-rated peers. Factors such as repeated debt-limit standoffs and last-minute resolutions, lack of a medium-term fiscal framework, and limited progress in tackling challenges related to rising social security and Medicare costs contributed to the downgrade.

The report also highlights a "steady deterioration" in US governance standards over the last two decades, with concerns about fiscal and debt matters. Fitch predicts that the general US government debt-to-GDP ratio will continue to rise from 112.9 per cent this year to 118.4 per cent by 2025. The agency's longer-term projections indicate additional debt/GDP increases, raising the vulnerability of the US fiscal position to future economic shocks.

Fitch's decision comes amid heightened scrutiny of US governance standards, debt-management credentials, and future economic prospects. The downgrade follows Standard & Poor's (S&P) similar action in 2011 when it downgraded the US' top rating of "AAA" to "AA+." Moody's remains the only Big Three rating firm to maintain the US' top credit rating.

The potential implications for financial markets include the likelihood of higher premia demanded by investors for holding long-term government debt, reflecting increased risk. While some analysts downplay sustained long-term damage, others note the potential weakening of the US dollar's position as the main global reserve currency over the long term. The US government has strongly objected to Fitch's decision, citing it as arbitrary and based on outdated data.