Fitch Downgrades US Credit Rating

  • August 3, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Fitch Downgrades US Credit Rating

Subject :Economy

Section: External Sector

Context: Global rating agency Fitch Ratings downgraded the United States’ long-term foreign currency issuer default rating from AAA to AA+ with a ‘stable’ outlook.

Key Points:

  • The agency cited fiscal deterioration as well as a high and growing government debt burden. In May, it placed the country’s rating on negative watch due to the debt ceiling fight.
  • Already S&P in 2011 downgraded the US credit rating from AAA to AA+ for the first time in 70 years, saying the budget deal brokered in Washington didn’t do enough to address the gloomy outlook for US finances.
  • The credit rating reflects the creditworthiness of an individual, company, or government. Different rating agencies follow different criteria for assigning ratings.
  • For Fitch Ratings, an AAA rating is the best, and an AA+ rating refers to high quality. The US credit rating has been reduced to AA+ with a ‘stable’ outlook, which means the creditworthiness still remains strong. The US credit rating downgrade has the potential to impact global markets.
  • How will it influence US treasury bond prices?
    • The U.S. Treasury bonds are considered a benchmark for safe-haven assets worldwide. The downgrade may result in higher yields on U.S. government debt as investors demand higher compensation for perceived increased risk.
    • This could lead to a sell-off of U.S. Treasuries by investors seeking higher returns, potentially driving down bond prices.

How Will This Impact Indian Markets?

  • Anything major happening in the US economy impacts the world market, including India.
  • A reduced rating may slow down investments to some degree, which will put pressure on the Indian equity market in the short term.
  • As investors become risk averse, the gold market will be set to benefit in this circumstance.
  • The US 10-year bond yield spiking above 4% and the dollar index rising to 102 are near-term negatives for emerging markets. (a rise in dollar index means in)
What is the dollar index?

  • The value of the U.S. dollar in relation to a basket of international currencies is gauged by the U.S. dollar index (USDX). The six currencies included in the USDX are the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.
  • The dollar index, among several other leading indicators, remains a closely watched yardstick by stock market analysts, strategists, and investors.
  • A stronger dollar bull market has been negative for stocks mainly because it impacts the profits of global corporations. A stronger dollar makes imports cheaper but makes exports more expensive and less competitive on world markets.
  • Why is it rising?
    • The strengthening of USDX has got to do with the US Fed raising interest rates. When rates are hiked, bonds are dumped and with the bond prices falling, the yield of these bonds goes up.
    • When yields are high, there is less incentive to invest in risker assets such as equities and hence stock prices fall. This is exactly what is happening in the US stock market as rising yields in 2022 are reflected in falling stock values since January this year.
economy Fitch Downgrades US Credit Rating