Fitch cut his outlook on US debt on Friday, warning that rising federal spending to deal with the coronavirus pandemic had led to a deterioration in public finances.
The rating agency lowered its outlook on the United States from “negative” to “stable”, but confirmed its triple A rating, its best rating. Fitch analysts said they believe there are growing risks that the United States will not be able to cut growing deficits as policymakers seek to revive economic growth.
U.S. lawmakers have agreed to provide more than $ 3 billion in relief this year to limit the economic damage caused by the pandemic. Spending, which is expected to increase in the coming months, has resulted in record Treasury bill issuance.
“High budget deficits and debt were already on an upward medium-term trajectory even before the onset of the huge economic shock precipitated by the coronavirus,” said Charles Seville, analyst at Fitch. “They started to erode the traditional credit strengths of the United States.”
Fitch predicted that US debt would reach 130 percent of gross domestic product in 2021. However, he noted that the country had been able to guarantee record borrowing costs, further emphasizing the US government’s “exceptional financing flexibility”. .
With the benefits of previous stimulus packages due to expire at the end of July, Congress is working on a new stimulus bill. But disagreements between the White House and Congressional Republicans have blocked progress on a deal, and Democrats and Republicans have yet to agree on key terms, including the amount of additional unemployment benefits.
Fitch said he expects the $ 1 billion stimulus to be approved by Congress in August. He predicted that the US economy would contract 5.6% this year, even with government intervention.
“There is a growing risk that US policymakers will not consolidate public finances enough to stabilize public debt after the pandemic shock has passed,” Seville said.
The announcement had little impact on trading on Friday night. The 10-year Treasury yield remained near an all-time low of 0.53%, as the dollar clung to gains against other currencies, including the euro.
“It is a truism that the US government cannot run out of money to pay off its debts,” Seville said. “However, there is a potential (albeit small) risk of fiscal domination if [debt-to-GDP] spirals, posing risks to U.S. economic dynamism and the status of the reserve currency. “
The United States has a triple A rating from Moody’s and a double A plus rating from S&P Global. The US credit rating downgrade by S&P in 2011, the first ever by a leading rating agency, followed a dispute in Congress over the debt ceiling.