Debt and deficits, which were already rising before the pandemic, have started to erode the country's traditional credit strengths, the credit rating agency said.

Men walk past the headquarters of Fitch Ratings in New York on February 6, 2013.
Men walk past the headquarters of Fitch Ratings in New York on February 6, 2013. (AFP)

Fitch Ratings has revised the outlook on the United States' triple-A rating to negative from stable, citing eroding credit strength, including a growing deficit to finance stimulus to combat fallout from the coronavirus pandemic.

The credit rating agency also said on Friday the future direction of US fiscal policy depends in part on the November election for president and the resulting makeup of Congress, cautioning there is a risk policy gridlock could continue.

Debt and deficits, which were already rising before the pandemic, have started to erode the country's traditional credit strengths, Fitch said in a report.

"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 policymakers will not consolidate public finances sufficiently to stabilise public debt after the pandemic shock has passed," Fitch said.

It added that US government debt, the highest among any AAA-rated sovereign nations heading into the crisis, was expected to exceed 130 percent of gross domestic product by 2021.

Credit rating agencies often use changes in outlooks to signal possible future moves in the overall rating.

The Congressional Budget Office has projected that the deficit for this budget year, which ends September 30, will surge to an all-time high of $3.7 trillion. That would be up from an already high deficit of $984.4 billion last year.

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Indifferent or sensitive market?

Mike Englund, chief economist at Action Economics, predicted markets would react negatively to the move.

"It reduces confidence in US financial markets and it does prompt some entities to want to sell Treasuries, so you may see some back up in yields even though no one is really looking for US defaults," he said.

Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California, said investors would probably not react strongly to Fitch's announcement.

“If people really had jitters about US debt, you wouldn’t see bond yields where they are," Merk said. "It’s noteworthy, but with everything happening in the US and other countries, the quality of balance sheets is deteriorating, and that is not a surprise.”

The outlook revision to negative covers a longer time frame, meaning the United States does not face a potential rating downgrade anytime soon. That leaves the country with top ratings from two credit agencies, Fitch and Moody's Investors Service, which affirmed an Aaa rating with a stable outlook in June.

Standard & Poor's Global Ratings, which dropped the country's credit rating by a notch to AA-plus in 2011 in the wake of the financial crisis and Great Recession, has a stable outlook on that rating.

That was the only downgrade to the US rating by major credit agencies in modern times. 

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Source: TRTWorld and agencies