Fitch Ratings, the global credit rating agency on Friday 31 July 2020, revised the U.S outlooks to negative from stable although the agency affirmed United States’ Long-Term Foreign-Currency (LTFC) and Local-Currency (LC) Issuer Default Ratings (IDRs) at ‘AAA.
According to the rating action commentary released by the agency, Fitch considers U.S. debt tolerance to be higher than that of other ‘AAA’ sovereigns. The revision of the outlook to negative is to reflect the ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan.
This is coming as the economic impact of the lockdown as a result of Covid-19 pandemic took its toll on the U.S GDP, which shrank at record rate in the second quarter of the year.
Although a massive policy response such as the Cares Act has prevented a deeper downturn as expected by some analysts, Fitch expects a less severe contraction in the U.S. in 2020 than in many other advanced economies.
According to the rating agency, the U.S. had the highest government debt of any AAA-rated sovereign heading into the crisis, and Fitch expects general government debt to exceed 130% of GDP by 2021.
Fitch expects the general government calendar year deficit to widen to over 20% of GDP in 2020. The agency expects the deficit to narrow to 11% of GDP in 2021 as economic support measures are rolled back. It also expects inflation to remain low, averaging below 1% in 2020-2022
The cumulative federal deficit in the first nine months of FY20 (starting in October 2019) reached USD2.7 trillion, compared with USD747 billion in the same period of FY19. Spending rose by USD1.6 trillion, or by 49%. The Congressional Budget Office (CBO) estimated in April that the federal deficit would reach USD3.7 trillion in FY20.
The U.S. government has demonstrated exceptional financing flexibility, according to Fitch by borrowing just under $3 trillion between the end of February and the end of June, of which USD2.5 trillion was in the form of treasury bills, while the Fed has intervened to backstop financial markets (expanding its balance sheet by USD2.6 trillion since mid-March) and boost global dollar liquidity.
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Amid a borrowing surge, borrowing costs have fallen, with the 10-year treasury bond yielding 0.6%. Marginal government borrowing costs currently average below 1% for up to 20 years. The effective interest rate on the federal government debt stock fell (by 0.75 percentage points (pp) compared with a year ago) to 1.75% by June 2020, and should continue to fall.
As the country is in its election year, the future direction of fiscal policy depends partly on November’s presidential and congressional elections.