Investing.com - European markets are trading in the red on Wednesday -Ibex 35, CAC 40, DAX... - following falls in Asia and a mixed close on Wall Street yesterday.
Investors are once again showing their fear of the world's largest economy after the international rating agency Fitch downgraded the US long-term rating to 'AA+' from 'AAA'.
"The US downgrade reflects the expected fiscal deterioration over the next three years, a high and rising general government debt burden, and governance erosion relative to 'AA' and 'AAA' rated peers over the past two decades that has manifested itself in repeated debt limit clashes and last-minute resolutions," Fitch warns in its statement.
In Fitch's view, "there has been a steady deterioration in governance standards over the past 20 years, including on fiscal and debt issues, despite the bipartisan agreement in June to suspend the debt limit until January 2025."
"The repeated debt limit, political clashes and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most of its peers, and has a complex budget process. These factors, together with various economic shocks, as well as tax cuts and new spending initiatives, have contributed to successive increases in debt over the last decade. In addition, there has been only limited progress in addressing medium-term challenges related to rising social security and Medicare costs due to the ageing population," Fitch says.
The agency expects the general government (GG) deficit to rise to 6.3% of GDP in 2023 from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden.
"Lower deficits and high nominal GDP growth reduced the debt-to-GDP ratio over the past two years from the pandemic peak of 122.3% in 2020; however, at 112.9% this year, it is still well above the pre-pandemic 2019 level of 100.1%. The debt ratio is more than two and a half times higher than the median 'AAA' of 39.3% of GDP and median 'AA' of 44.7% of GDP. Fitch's longer-term projections forecast additional increases in debt/GDP, increasing the vulnerability of the US fiscal position to future economic shocks," the agency explains.
"Higher interest rates and rising debt burdens will increase interest service burdens, while an ageing population and rising health care costs will increase spending on the elderly in the absence of fiscal policy reforms," Fitch warns.
(Article translated using DeepL)