US debt shudders
A downgrade of the US sovereign debt rating to AA+ from AAA by Fitch Ratings overnight on Tuesday sent shudders around the world, with stock markets tumbling by as much as 2.5%. In India, the S&P BSE Sensex closed about 1% lower on Wednesday. Fitch’s move reminds us of a similar rating cut by Standard & Poor’s in 2011.
Only, this time the US economy is doing much better, with unemployment in check and business activity healthy. The fiscal deterioration that led to Fitch’s cut has also been in evidence. America’s “exorbitant privilege" of issuing paper used globally as a store of value has long insulated it from downgrades.
Its bonds are spoken of as being risk-free. Still, with US national debt having climbed to a staggering $33 trillion and its lawmakers increasing its debt limit repeatedly, its fiscal zest did need a flag of caution held up. Even if Fitch’s revision does not exert much upward pressure on US yields or noticeably raise the cost of capital in its economy, the US administration has been served a sharp reminder to tighten its fisc.
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