One of the world’s major credit-rating companies fired a warning shot regarding the US’ worsening public finances on Friday, just as lawmakers in Washington contemplate spending more to combat the economic fallout from the coronavirus pandemic.

Fitch Ratings revised its outlook on the country’s credit score to negative from stable, citing a deterioration in the US public finances and the absence of a credible fiscal consolidation plan. The country’s ranking remains AAA.

“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,” Fitch said. “They have started to erode the traditional credit strengths of the US.”

Unemployment has sky-rocketed and the US economy just notched up its worst quarter on record, with pandemic-related shutdowns helping drive an annualised gross domestic product contraction of 32.9 per cent in the three-month period through June. And with infections still spreading rapidly in many states, the virus’ damaging impact on output looks set to continue.

Support from Congress has buoyed the economy in recent months, but further action will be critical in determining the path toward recovery. Crucial lifelines for jobless workers, like an extra $600 in weekly unemployment benefits, are expiring, and lawmakers have made little progress on agreeing to another stimulus package.

But while further measures — if settled on — could help support the economy, they would also likely add to the nation’s debt pile and worsen the fiscal deficits that caused Fitch additional concern. There is, however, no sign yet of a deal as upcoming elections for the presidency and Congress help sharpen partisan divisions.

Stimulus burden

General government debt is expected to exceed 130 per cent of GDP by 2021, Fitch said, noting that the US had the highest government debt of any AAA rated sovereign heading into the current crisis.

“Financing flexibility, assisted by Federal Reserve intervention to restore liquidity to financial markets, does not entirely dispel risks to medium-term debt sustainability, and there is a growing risk that US policy makers will not consolidate public finances sufficiently to stabilise public debt after the pandemic shock has passed,” Fitch said.

The US central bank has reiterated its promise to use all its tools to support the recovery, keeping interest rates near zero and noting that the economy’s path is extraordinarily uncertain in the face of virus risks.

Fitch is not the first major ratings company to take a less-than-stellar view of Americas public finances. S&P Global Ratings has already gone further, taking an axe to the country’s AAA score back in 2011 and downgrading it to AA+. Moody’s Investors Service, meanwhile, continues to rank the US as Aaa — its top grade.

Fitch’s warning, just as the US Treasury is preparing to release its quarterly financing plans next week, comes even as borrowing costs fall to unprecedented levels. Nominal yields on Treasuries are close to historic lows, while the real rate on 10-year debt — which factors in the impact of inflation — fell to around minus 1 per cent on Friday.

Yet even with an assumption that real rates will remain negative and support public debt, and the credit assessors view that America’s debt tolerance is higher than other AAA sovereigns, Fitch has become less optimistic about the US outlook.

comment COMMENT NOW