Source: Wall Street News

After a lapse of 12 years, the US was once again downgraded by an international rating giant. What does this mean for global financial markets?

On Tuesday local time,The rating agency Fitch stripped the US of its highest credit rating and downgraded it from AAA to AA+ on the grounds that it expects the fiscal situation to deteriorate over the next three years and that the government debt burden is high and growing.

Just two months ago, the Biden administration and the Republican-controlled House of Representatives finally reached an agreement to raise the government debt ceiling from 31.4 trillion US dollars after months of extreme scrutiny.

Fitch said in a statement:

Although the two parties agreed to suspend the debt ceiling until January 2025 in June, the standards of governance over the past two decades, including fiscal and debt issues, have continued to worsen.

US Treasury Secretary Yellen responded to the downgrade, calling it “arbitrary” and “out of date.” In a statement, she said:

I strongly disagree with the Fitch Ratings decision.

Market reaction is lukewarm, Wall Street warns of debt risks

This is the second time that the US has been downgraded after Standard & Poor's downgraded the US rating in August 2011.

Today,Of the three major rating agencies, currently only Moody's maintains an AAA rating for the US; both Fitch and S&P have downgraded the US credit rating to AA+.

Given the uproar caused by the S&P ratings incident 12 years ago in global financial markets, some people worry that the US and even global financial markets may experience turmoil on Wednesday.

However, the market's reaction doesn't seem to have been drastic.

After Fitch downgraded the US rating, the US dollar index declined slightly in the short term, but now it has resumed gains. Futures on the three major US stock indexes have fallen, and US debt has risen.

Laura Fitzsimmons, executive director of Macro Interest Rates and Foreign Exchange Sales at J.P. Morgan Chase in Sydney, said,Although the dollar has weakened, “the reaction so far has been pretty calm, and we don't expect any more changes.”

Experience in 2011 shows that in this environment, the US dollar and US debt (investors) are turning to higher quality currencies. This is what usually happens when America's sovereign rating is downgraded due to its critical global position; now the situation is quite the opposite.

Michael Schulman, chief investment officer of the investment agency Running Point Capital Advisors, said:

I have a feelingThe treasury bond market will generally stay calm, because the US is generally seen as strong, but I think it's just a small hole in our armor.

This has caused damage to America's reputation and position, but frankly speaking, we did experience an actual game a few months ago.

I think this move confirms the tense mood in the market a few months ago.

Eric Winograd, chief economist at US asset management giant Alliance Bernstein, said:

Look, no one is seriously considering the prospect that the US won't be able to pay its debts. Demand for long-term and short-term treasury bonds will continue to exist,I don't think this downgrade is because it's an important sign of any trouble in the future.

Although the market reaction was lukewarm, many analysts once again warned about the thunderstorm of US debt burial.

Steven Ricchiuto, US chief economist at Mizuho Securities, said:

I think this is the first additional warning to the US government that its spending is unsustainable compared to taxes. We have reached a point where net interest on public debt is higher than the ability of the economy to grow, and we cannot get out of trouble through growth.

This is basically telling you that there is a problem with the US government's spending. This is an unsustainable budget situation because economic growth cannot even escape the problem. As a result, they will either have to fix this, or accept the potential consequences of further downgrades.

Wendy Edelberg, director of the Hamilton Program at the Brookings Institution in Washington, D.C., said:

The impact of the downgrade is definitely negative, but we'll have to wait a few times to evaluate its impact.

I'm surprised at the timing of the downgrade because I don't understand how they (Fitch) now have worse information than before the debt ceiling crisis was resolved. Until the debt ceiling crisis was resolved, they had already left the US in trouble (putting the US on) a negative watch list, but since then we have received a lot of good news about the fiscal outlook.

Quincy Krosby, chief global strategist at LPLFinancial, said:

Economists focus on deficits and then assume that as the deficit grows, your currency will depreciate and soften. This is a textbook. As the deficit grows, your currency depreciates, and Fitch puts us in textbook-like reasons.

Ironically, in many cases, the dollar continued to rise against other currencies as the deficit (grew).

This is a warning. Economists say that if the US fiscal situation is not normal, the dollar will depreciate. Fitch is essentially saying that this is going to happen and that the dollar will be the victim.

Analysts are more surprised

Since two months have passed since the debt ceiling crisis, many analysts feel somewhat uncertain about the timing of Fitch downgrading the US rating.

Keith Lerner, Co-Chief Investment Officer of Atlanta's Truist Advisory Services, said:

This is unexpected and a bit leftist. As far as the market impact is concerned, there is currently no certainty. The market is at a stage where it is vulnerable to bad news...

Wendy Edelberg, director of the Hamilton Program at the Brookings Institution in Washington, D.C., said:

I'm also baffled that the motive for the downgrade seems to be related to the financial situation, which is all very good. Unless they think the financial situation indicates a risk of default, I don't think they say that; I don't understand why.

I think the second downgrade (impact) will be more important before a debt ceiling agreement is reached. It makes people feel like they have a reasonable motive, and it also makes people more worried.

Michael O'Rourke, chief market strategist at financial services firm JoneStrading, said:

Um, according to today's bond market trend, some people know that because the treasury bond market's performance is weak for no reason, it's just economic data. The ISM index is weaker than expected and weak, and the global ISM index is also very weak. So, I'd like to say that the performance of bond market activity is as if anyone knew it. So is it absolutely surprising to me that they did this? Yes.

In August 2011, Standard & Poor's downgraded the US rating from AAA to AA, and the president of S&P stepped down within about three weeks. Obviously, if it were Moody's, things would be more serious, and this is definitely something people must consider and be aware of.

Jack Ablin, chief investment officer of Cresset Capital Management said:

I'm surprised, but at the same time I'm not surprised.

The problem with sovereign debt is that it's not just the ability to pay, but the willingness to pay, which creates some problems. Every time we enter into negotiations, we get in trouble, it's frustrating, and it causes unnecessary pain.

It's really a troubled negotiation that happens every time we negotiate a debt ceiling or budget. We are preparing for another fall shutdown. We have to overcome this.

Editor/jayden