Why the US Credit Rating Was Cut and What It Means: QuickTake

Americans generally expect to be No. 1 at everything. So the downgrade of the country’s credit rating for only the second time ever rattled the country’s pride and the global financial system. The US was stripped of its top-tier sovereign credit rating by Fitch Ratings on Aug. 1, echoing a move more than a decade ago by S&P Global Ratings. Both markdowns were spurred by bitter standoffs over the nation’s borrowing. History suggests that the impact on financial markets may be short-lived, though the move could provide fodder for more political battles.

Fitch said the one-step downgrade to a rating of AA+ reflects an “erosion of governance” that has “manifested in repeated debt limit standoffs and last-minute resolutions.” That’s because every few years, through a policy of its own making, the US faces the prospect of a debt default. A law dating to 1917 led to a fixed aggregate dollar limit on borrowing — the debt ceiling — which can be raised only by agreement of Congress and the president. That specter hung over the US for the first half of 2023 as the US grew perilously close to a debt limit of nearly $31.4 trillion and politicians ran down the clock. The standoff was resolved in late May, but it fueled uncertainty again about the commitment of US political leaders to put risky rhetoric aside and meet bond repayments on a mounting debt burden.