In a surprise move, global rating agency Fitch downgraded the US government’s credit rating from AAA to AA+ on Tuesday.
In a report released on its website, the ratings agency cited expected fiscal deterioration over the coming three years, a high and growing government debt burden and “erosion of governance… that has manifested in repeated debt limit standoffs and last-minute resolutions” as motivating the downgrade.
The downgrade comes two months after Congress reached a last-minute deal to lift the US debt ceiling after months of deadlock.
Credit ratings are used by investors to assess the riskiness of the debt issued by companies and government.
US Treasury Secretary Janet Yellen issued a response where she was critical of the decision, saying it is “arbitrary” and “based on outdated data”.
Fitch’s downgrade comes 12 years after fellow rating agency Standard & Poor’s (S&P) cut the US’ debt rating from AAA to AA+ following a similar debt ceiling standoff, where it remains to this day.
Though the move caught investors by surprise, the market impact was limited.
Bitcoin was last trading in the $29,400s, having bounced an impressive near 3% from earlier intra-day lows in the $28,500s.
Crypto Sell-off Incoming?
When S&P cut the US’ credit rating back in 2011, the result was a short-term hit to investors’ risk appetite and a stock market sell-off.
S&P 500 futures are currently trading around 0.3% lower at the start of the Wednesday Asia session and there is a risk that those losses could deepen.
If that’s the case, crypto could also come under heightened sell pressure on Wednesday.
However, with data in recent weeks revealing that the US economy has continued to outperform expectations so far in 2023, investors seem not to be reading too much into Fitch’s decision, at the moment anyway.
“The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept,” said former US Treasury Secretary and National Economic Council Director Larry Summers.
If that’s the case, follow-through sell pressure in the stock and crypto markets over the next few days might not be too bad.
Investors are likely to focus more on incoming key US labor market data on Friday, which could impact the outlook for Fed monetary policy tightening.
Does Fitch’s Downgrade Boost Crypto’s Use Case?
Some crypto proponents might argue that the downgrade reflects the poor long-term economic fundamentals that give scarce cryptocurrencies like bitcoin value.
An ever-rising US debt burden undermines the value of the US dollar in the long run, not least because of the inflationary impact of deficit spending.
Crypto bulls are likely to cite Fitch’s downgrade as fresh evidence to support their thesis that the fiat-based US economic system is rotten, and a transition to a decentralized financial system centered on cryptocurrencies like bitcoin and on DeFi supporting smart-contract-enabled blockchains like Ethereum.
But this is unlikely to spur near-term buy pressure, with most crypto traders still focused on other themes like spot bitcoin ETF applications and the SEC’s regulation by enforcement drive.
A more serious event that highlights the weakness of the existing fiat-based financial system – such as a repeat of March’s “mini bank crisis” – would likely be needed to spur fresh safe-haven demand for crypto.
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