Fitch US downgrade followed protocols, despite timing questions
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[August 05, 2023] By
David Lawder and Davide Barbuscia
WASHINGTON (Reuters) - When Fitch Ratings dropped its bombshell
downgrade of the U.S. credit rating on Tuesday, Biden administration
officials cried foul over the "bizarre" timing and argued that it
unfairly punishes them for political chaos under President Donald Trump.
Harvard's Larry Summers and JPMorgan's Jamie Dimon were among those who
blasted the decision as "inept" and "ridiculous," respectively,
questioning the timing of the downgrade two months after the White House
and Congress had worked together to avert a debt ceiling crisis.
However, Fitch followed a well-established process as it made its
assessments in previous weeks and included U.S. officials at several
steps along the way, Reuters' reporting shows. Fitch told the U.S.
Treasury about its ultimate decision about 24 hours ahead of the
announcement.
Fitch announced in late May, at the height of the debt ceiling stalemate
between President Joe Biden and Republicans in Congress, that the U.S.
AAA rating was being put on credit watch-negative.
At that time, Fitch warned of brinkmanship over the debt ceiling,
"failure of the U.S. authorities to meaningfully tackle medium-term
fiscal challenges" and a growing debt burden.
Richard Francis, a senior director at Fitch, told Reuters on Wednesday
when asked about the timing of the downgrade, that the agency "wanted to
kind of really take a deep look" at long-standing concerns around
governance and the U.S. debt profile.
Despite the bipartisan debt deal in June, Fitch's continued concern
about debt ceiling brinksmanship, a broken budget process and rising
debt levels were made clear last week in discussions the agency held
with U.S. Treasury officials about the factors being considered in its
ratings review, U.S. officials said.
Fitch's recent talks with the Treasury did not include the actual
downgrade decision, Francis said, because it had not yet been made by
the agency's ratings committee.
"We didn’t actually say we were about to downgrade but we did say that
we would have an upcoming committee soon," Francis told Reuters on
Wednesday.
On Monday, Fitch's credit committee met, made a decision, and Treasury
officials received the Fitch press release of the downgrade. That gave
Treasury about 24 hours to craft a public response -- a notification
that one U.S. official said was consistent with past reviews.
Sharing the press release ahead of time allows Fitch to ensure that
"there's nothing factually wrong in the report and to make sure there’s
nothing (in it) that they told us in confidence," Francis said.
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The offices of Fitch Ratings building
appears empty in Canary Wharf, following the outbreak of the
coronavirus disease (COVID-19), London, Britain, May 27, 2020.
REUTERS/Dylan Martinez
The exact moment of the downgrade announcement Tuesday afternoon,
just minutes after former President Donald Trump was indicted for
attempts to overturn the 2020 election, was settled weeks before.
"The timing of the committee was pure coincidence," Francis told
Reuters on Friday, noting the date was set weeks ago. "The committee
was held on Monday, July 31st. We always give the authorities
twenty-four hours to respond and publish after markets close."
Fitch cited "erosion of governance," including repeated debt limit
standoffs with last-minute resolutions as a key factor in its
decision, along with rising debt levels and lack of progress in
tackling medium-term fiscal challenges such as rising Social
Security and Medicare costs.
The Biden administration says that is unfair.
Debt ceiling votes have been "acrimonious for decades," one U.S.
official complained, referring to a long history of standoffs. "It
strikes us as quite strange to take the successful resolution this
time, with over $1 trillion of deficit reduction, as a negative sign
by Fitch in this case."
Biden administration officials complain that Fitch "repeatedly
brought up" in meetings the Jan. 6 insurrection at the U.S. Capitol
as Trump sought to overturn election results as a sign of eroded
governance.
Putting aside the timing of the latest decision, the longer-term
issues that Fitch has highlighted resonate.
"Fitch isn't telling anybody anything they don't already know," said
Mark Sobel, a former longtime Treasury official who is now U.S.
chairman of financial think-tank OMFIF.
Fitch's assessment of U.S. debt sustainability in the near term is
wrong, Sobel said, because the dynamic U.S. economy is keeping it
afloat.
But longer term, he said, "neither political party has evinced the
guts to begin making the sacrifices needed on both the spending and
revenue sides -- which will only increase as time marches on."
"May Alexander Hamilton rest in peace," Sobel added, referring to
the first US Treasury secretary who tackled the new country's
government debt with a new wave of taxes and other
revenue-generating measures.
(Reporting by David Lawder and Davide Barbuscia, Editing by Heather
Timmons and Alistair Bell)
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