The AA+ rating is one level below AAA, meaning the US no longer has what Fitch defines as the “highest credit quality.” While Fitch says that AA ratings denote “expectations of very low default risk,” that’s a step down from “the lowest expectation of default risk” for AAA borrowers. Similarly, the top rating is assigned only in cases of “exceptional strong capacity” to meet financial commitments, while AA tier credit scores indicate a “very strong capacity,” according to Fitch. Globally, Fitch is considered the smallest of the “big three” rating firms which include Moody’s Investors Service and S&P.

Expected fiscal deterioration over the next three years

• The government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.
• Only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.
• Over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms.

A high and growing general government debt burden

The US Treasury boosted the size of its quarterly sale of longer-term debt for the first time in over 2 1/2 years, testing dealers’ appetites amid an increase in government borrowing needs so alarming it helped spur Fitch Ratings to cut the US sovereign rating from AAA.

The Treasury said it will sell $103 billion of longer-term securities at its so-called quarterly refunding auctions next week, which span 3-, 10- and 30-year Treasuries. That’s up from a $96 billion total last time, and slightly larger than most dealers had expected.

Part of that deterioration is thanks to higher interest the Treasury now pays on its debt. The Treasury has also said its tax receipts have been weaker than expected. And in the meantime, the Federal Reserve’s continuing runoff of its holdings of Treasuries, of up to $60 billion a month, requires the government to sell more to the public.

The erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions. here 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.

Video Length: 00:11:31

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