According to the BBC today, Fitch, one of three major independent agencies that assess creditworthiness, cut the rating from the top level of AAA to a notch lower at AA+.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” relative to peers, said Fitch in a statement.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency said.
Almost certainly due to the fight in Congress about the debt ceiling. For some reason those fights only really happen while a Democrat is President. The Republicans in Congress don’t care so much when Republican Presidents spend and create deficits and need to raise the debt ceiling.
There was a time more than two decades ago, when credit ratings (primarily for debt issuers, government or corporate) had significant value. After the fall of Enron and then the Great Recession, investors confidence in the ratings issued by these agencies significantly waned. If you were a corporate borrower, your bank credit facility or bond documents would require you to obtain in many cases credit ratings from at least 2 credit agencies. This is normally no longer the case. Lenders and investors are expected to determine their own level of credit risk they are willing to accept by performing their own independent credit analysis. As such, Moody’s, S&P and Fitch have seen a significant hit to their own business models.
Credit rating determines the interest you pay, in a round about way. So if your credt rating gets worse, you pay higher interest. Consequently, those holding existing bonds which pay a lower interest rate (from before the rating drop) now have securities that are harder to sell on the market (i.e. sell for less than before). Obviously, a bit more complex than that, but…
So by letting its rating drop, the USA is in some way screwing over those who lent it money before. It will make those lenders less likely to buy their bonds in future (if there are more reliable/lucrative altenatives). Also, each move of the credit rating/interest will make the lenders more likely to look toward the future and try to anticipate further moves and hedge against them.
The biggest draw of US binds is reliablity - no matter what the situation, the USA is far less likely than many others to default. (Except when congress gets into a pissing contest…) Plus, they will pay in US dollars, which seems so far to be a stable currency.