Fitch cut its outlook on US debt on Friday, warning that the rise in federal spending to deal with the coronavirus pandemic had led to a deterioration in public finances.
The rating agency lowered its outlook on the US to “negative” from “stable”, but affirmed its triple A rating, its top grade. Fitch analysts said they believed there were growing risks the US would be unable to curtail rising deficits as policymakers seek to jump-start economic growth.
US legislators have agreed to more than $3tn worth of relief packages this year to limit the economic damage from the pandemic. The spending, which is likely to increase in the months ahead, has resulted in record issuance of Treasuries.
“High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus,” said Charles Seville, an analyst with Fitch. “They have started to erode the traditional credit strengths of the US.”
Fitch projected US debt would reach 130 per cent of gross domestic product in 2021. However, it noted that the country had been able to secure record-low borrowing costs, further underscoring the US government’s “exceptional financing flexibility”.
With benefits from earlier stimulus programmes set to elapse at the end of July, Congress has been working on a new stimulus bill. But disagreements between the White House and congressional Republicans have stalled progress on a deal, and Democrats and Republicans have yet to agree on key terms, including the size of extra unemployment benefits.
Fitch said it expected $1tn in stimulus to be agreed by Congress in August. It projected the US economy would contract by 5.6 per cent this year even with government intervention.
“There is a growing risk that US policymakers will not consolidate public finances sufficiently to stabilise public debt after the pandemic shock has passed,” Mr Seville said.
The announcement had little impact on trading late on Friday. The yield on the 10-year Treasury remained near a historic low of 0.53 per cent, while the dollar clung on to gains against other currencies, including the euro.
“It is a truism that the US government cannot run out of money to service its debts,” Mr Seville said. “However, there is a potential (albeit remote) risk of fiscal dominance if [debt-to-GDP] spirals, posing risks to US economic dynamism and reserve currency status.”
The US holds a triple A rating from Moody’s and a double-A plus rating from S&P Global. The downgrade of the US credit rating by S&P in 2011, the first ever by a leading rating agency, followed a row in Congress over the debt ceiling.