Fitch Ratings, the global rating agency, downgraded the United States’ long-term foreign currency issuer default rating from AAA to AA+ with a ‘stable’ outlook on Tuesday. The downgrade was prompted by the expected fiscal deterioration over the next three years, along with a high and growing government debt burden. Fitch also noted a decline in governance compared to ‘AA’ and ‘AAA’ rated peers over the past two decades, leading to repeated debt limit standoffs and last-minute resolutions.
This is not the first time the US credit rating has been downgraded. In 2011, S&P downgraded it from AAA to AA+ for the first time in 70 years, citing insufficient measures to address the gloomy outlook for US finances.
Different rating agencies have their own criteria for assigning ratings regarding creditworthiness. Fitch Ratings considers an AAA rating as the best, while an AA+ rating represents high quality. Despite the downgrade, the US creditworthiness remains strong, but the event has the potential to impact global markets.
The US benchmark equity index, Dow Jones, saw a 0.20 per cent increase, whereas the BSE Sensex tumbled over 1% on weak global cues. Other Asian markets, fell up to 2 per cent following the downgrade, with technology stocks particularly affected due to their reliance on the US and western markets for business.
Experts commented that Fitch’s downgrade is a sentiment negative for global markets, with US 10-year bond yields spiking above 4% and the dollar index rising to 102, presenting near-term challenges for emerging markets.
Some analysts expect the gold market to continue to benefit under these circumstances. However, it’s worth noting that the negative knee-jerk reaction is expected to be temporary on Indian Markets.
For Indian markets, other fundamental factors such as earnings, crude prices, RBI policy, and fund flows are likely to remain the primary focus for investors.