Debt Ceiling Woes Lead to US Downgrade — Will ‘Eroded Confidence’ in the Dollar Affect Your Wallet?
Fitch Ratings downgraded the country’s long-term foreign-currency issuer default rating to AA+ from AAA on Monday, Aug. 1, because “the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” according to a statement.
Fitch had placed the country’s rating on negative watch in May, citing the debt ceiling standoff, as GOBankingRates previously reported.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said in the statement.
Following Fitch’s announcement, several administration officials voiced their discontent about the decision. Treasury Secretary Janet Yellen said in a statement that it was “arbitrary.”
“I strongly disagree with Fitch Ratings’ decision. The change by Fitch Ratings announced today is arbitrary and based on outdated data,” Yellen said in the statement.
Fitch also noted that tighter credit conditions, weakening business investment and a slowdown in consumption “will push the U.S. economy into a mild recession in 4Q23 and 1Q24.”
In terms of how this will affect Americans, as CNN explained, “the downgrade has potential reverberations on everything from the mortgage rates Americans pay on their homes to contracts carried out all across the world.”
“The move could cause investors to sell U.S. Treasuries, leading to a spike in yields that serve as references for interest rates on a variety of loans,” CNN added.
Sammie Ellard-King, personal finance advisor at Up The Gains, said that the downgrade’s implications for consumers would be felt particularly in terms of borrowing costs.
“If a country is downgraded, it suggests higher risk, which can lead to increased interest rates to compensate for that risk,” said Ellard-King. “This trickles down to consumers who are seeking to borrow money, as banks and other lenders may raise their rates. That means the cost of borrowing, for example to buy a home or a car, could become more expensive. Mortgage rates and loan interest rates could rise, making monthly repayments higher and potentially stretching consumers’ budgets.”
Ellard-King emphasized the importance for consumers to keep an eye on such macroeconomic factors, as they can impact personal finance in indirect ways.
“Even if a rate increase isn’t immediate, a downgrade can signal potential future financial changes,” he added.
Yet, other experts believe that while it is a black mark on the U.S., the consequences will be minimal.
Mohamed El-Erian, economist and chief economic adviser at Allianz, said he was “puzzled” by the decision.
“I am very puzzled by many aspects of this announcement, as well as by the timing. I suspect I won’t be the only one,” he tweeted, adding that the vast majority of economists and market analysts are likely to be equally perplexed by the reasons cited and the timing.
“Overall, this announcement is much more likely to be dismissed than have a lasting disruptive impact on the US #economy and #markets,” he added.
In a subsequent tweet, he shared that he believes these three economic components will be most impacted by the downgrade:
- Government bond yields
- The dollar
- Credit default swaps
Other experts agree, saying that so far, the reaction seems more muted than when S&P downgraded the U.S. in 2011.
“Back then, the S&P 500 fell 6.5% in the first trading day after the downgrade and didn’t fully recover for six months,” said Ted Rossman, senior industry analyst at Creditcards.com. “While today could well be a down day on Wall Street, and prominent indexes in Asia and Europe have fallen 1-2%, the short-term reaction hasn’t been as significant. While there are always risks, I think this downgrade is largely being taken in stride and may not mean anything significant for U.S. consumers.”
However, Rossman noted that in the longer run, it will be important to monitor what this means for credit markets, as it’s possible that a downgrade will exacerbate already tightening credit conditions and could lead to wider credit spreads.
In turn, the biggest risk for consumers — other than maybe some heightened short-term market volatility — is if credit becomes harder to access and/or more expensive,” he added.
“That’s probably not the most likely scenario, but it will be worth watching. With the backdrop of 11 Fed hikes in 16 months, some of this is already happening, so we’ll need to monitor if the downgrade adds to the trend,” he said.
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