Key Points

• The U.S. credit rating downgrade from 'AAA' to 'AA+' by Fitch reflects concerns over fiscal management and has profound implications for investors.
• Despite initial market stability, potential future downgrades could cause further instability and reputational damage to the U.S.
• Australia's robust economy, AAA credit rating, and burgeoning private debt market present compelling investment alternatives, particularly in light of the U.S.'s downgrade.

For decades, the United States of America stood at the head of the class, a symbol of financial solidity, consistently achieving AAA ratings from the leading credit rating agencies.

However, the world's largest and safest ‌economy grew complacent.

In our June insight piece, we foreshadowed this report card, and it has now become a reality: Fitch Ratings has downgraded the United States of America's Long-Term Foreign-Currency Issuer Default Rating (IDR) from 'AAA' to 'AA+'.

The downgrade isn't just a mark on paper. The implications of this downgrade for the U.S. economy and investors are profound. In this article, we'll unravel these ramifications and explore alternatives for those who invest in the States.

But first, let's delve into why Fitch decided to grade the U.S. down.

What led to the U.S. falling grades

The recent downgrade of the U.S. credit rating from 'AAA' to 'AA+' reflects multiple concerns about the country's fiscal management and economic outlook.

Here are the specific reasons:

Erosion of governance:

Fitch highlights a 20-year decline in governance standards, especially in fiscal matters. The repeated debt-ceiling standoffs, a medium-term fiscal framework and a complex budgeting process have eroded confidence in government fiscal management.

Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an ageing population.

Rising general government deficits:

Fitch expects the general government (GG) deficit to rise to 6.3% of GDP in 2023 from 3.7% in 2022, reflecting weaker federal revenues and new spending initiatives.