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Fitch downgrades US outlook to negative from stable

Fitch downgrades US outlook to negative from stable

WASHINGTON, Aug 1, (BSS/AFP):
Ratings agency Fitch on Friday
downgraded the outlook for the
United States to negative from
stable, warning of high debt and
deficits made worse by the
coronavirus downturn.

“The outlook has been revised to
negative to reflect the ongoing
deterioration in the US public
finances and the absence of a
credible fiscal consolidation plan,”
Fitch said in a statement.

The US is home to the world’s worst
coronavirus outbreak, which has
caused tens of millions of layoffs
and a historic 32.9 percent collapse
in GDP in the second quarter after
businesses closed to stop the spread
of COVID-19.

Though it expected the US would
suffer a less-severe downturn this
year than other comparable
economies, Fitch said its decision
to change its outlook reflected
concerns of both mounting debt and
policy gridlock.

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

The agency affirmed the US’s AAA
rating but said it expected
government debt to hit 130 percent
of GDP by 2021.

The bill may stabilize from 2023,
but only if interest rates remain
low, and “it is uncertain whether
very low market rates will persist
once growth and inflation pick up,”
and rising health care and social
security costs could also threaten
the stability, Fitch said.

Lawmakers in Washington passed the
$2.2 trillion CARES Act in March to
blunt the pandemic’s blow and are
working on another massive spending
bill.

Fitch predicted the deficit will hit
20 percent of GDP this year before
scaling back to 11 percent of GDP in
2021 as the spending measures
conclude.

“It is a truism that the US
government cannot run out of money
to service its debts,” Fitch 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.”

Adding to the uncertainty is the
divided state of politics in
Washington ahead of elections in
November in which President Donald
Trump is standing for a second term.

Fitch warned of the consequences if
Congress and the White House can’t
agree in coming years on a path to
stabilizing the US’s finances.

“Political polarization may weaken
institutions and reduces the scope
for bipartisan cooperation,
hindering attempts to address
structural issues… but also longer-
term fiscal challenges,” the agency
said.

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