US credit rating downgrade chips away at its global dominance
Move reflects Washington's irresponsible policymaking that hurts world: analysts
Published: Aug 02, 2023 09:31 PM Updated: Aug 02, 2023 10:43 PM
A view of Wall Street in New York, the US Photo: IC

A view of Wall Street in New York, the US Photo: IC

Rating agency Fitch Ratings on Tuesday downgraded the US government's top credit rating, citing fiscal deterioration over the next three years and a steady deterioration in governance over the past two decades, marking only the second time in history that the US has been stripped off its top-tier credit rating. The downgrade has dealt a serious blow to the US' global reputation and standing amid a rapidly shifting global geo-economic situation.

While the move by the independent rating agency could add to turmoil in global financial markets, such direct impact is expected to be limited and temporary, analysts said. However, such moves, along with underlying worsening problem of the US economy and governance, will gradually chip away at the US' economic dominance and its dollar hegemony, as an ongoing de-dollarization continues to pick pace, the analysts noted. 

However, Washington's irresponsible policymaking both in terms of its domestic economic governance and economic and trade ties with other countries has already seriously hurt other economies, particularly developing countries, analysts said, adding that in contrast, China's robust efforts to ensure stable economic development will continue to make the country the biggest contributor to global growth for the foreseeable future, they added. 

US downgraded

Fitch said on Tuesday that it has downgraded the US' long-term foreign-currency issuer default rating to AA+ from AAA. "The rating downgrade of the [US] reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions," the rating agency said in a press release. 

More than just the US' fiscal deterioration, Fitch also offered a scathing critique of the erosion of the US governance over the past decades. "In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters," it said, adding that the repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management, and the US government lacks a medium-term fiscal framework, unlike most of its peers, and has a complex budgeting process.

The decision marked only the second time in history that the world's biggest economy's top tier rating has been downgraded. In 2011, amid a standoff over the US government's debt ceiling between the two US political parties, S&P Global Ratings cut the US' credit rating for the first time. In May, amid another partisan brinkmanship over the US debt that almost pushed the US to a historic default, Fitch put the US' top tier rating on watch. While a default was avoided after the two US political parties reached a temporary deal, another crisis is looming as US lawmakers will need to reach an agreement before the end of September to prevent a government shutdown. 

"Judging from the current development trend, the possibility of the US reducing its debt is almost zero. Under such a premise, additional borrowing needs to be supported by strong economic activities. Fitch's analysis is in line with the current trend and proves that the US' current economic situation does not support strong solvency of the US in the future," Li Yong, a senior research fellow at the China Association of International Trade, told the Global Times on Wednesday. "In the current situation where the US is fiscally unrestrained and ignores the need to reform, its debt burden will become heavier and heavier under its current governance level."

Fitch said that the US economy could fall into a mild recession in the fourth quarter of 2023 and the first quarter of 2024 due to tighter credit conditions, weakening business investment, and leading to a slowdown in consumption. Moreover, over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms, the agency said. 

Profound implications

Fitch's move on Tuesday is likely to have limited and temporary direct impact on the US economy and global markets, though short-term fluctuations in the dollar's exchange rates and global markets are expected, Chinese analysts said. However, the underlying problems revealed by the credit rating cuts underscored the seriousness of the fiscal and governance problems in the US and its irresponsible policymaking, which, in the long run, could mean profound implications for the US' global standing and global geo-economic situation, the analysts noted. 

"The negative effect of US monetary policy on the world economy is very significant … some countries have been badly hurt by the US monetary tightening, but there is nothing they could really do," because of the US dollar's systemic dominance, Lian Ping, chief economist and head of the Zhixin Investment Research Institute, told the Global Times on Wednesday, noting that under enormous pressure from a strong US dollar, some economies almost faced collapse. 

However, the good news is that the system of US dollar hegemony is in the process of crumbling, and "Fitch's downgrade of its credit rating may also be a part of the gradual decline of the US dollar system," Lian said. 

Reeling from negative impacts from the US' irresponsible domestic policies and relentless weaponization of the US dollar's dominance, many countries around the world, especially developing countries, have embarked on a de-dollarization trend. Meanwhile, thanks to China's stable economic development and growing cooperation with the rest of the world, many countries have turned to the Chinese yuan for everything from settling trade to repaying global debt. In June, the yuan's share of global payments reached its second-highest level since tracking began in October 2010, according to the Society for Worldwide Interbank Financial Telecommunication.

"Amid the increasingly complex geopolitical situation today, more and more countries have started the de-dollarization process and Fitch's downgrade of the US rating may accelerate that process," Ming Ming, chief economist at CITIC Securities, told the Global Times on Wednesday, adding that many countries, including China, could also continue to reduce holdings of US debts. 

Compared with the US' increasingly prominent economic problems and Washington's lack of a concrete plan to tackle them, China's economy remains on a positive upward trend in the long-term and will remain the biggest contributor to global growth for the foreseeable future despite downward pressure, thanks to the country's sound policymaking and execution, analysts said. 

"Although China's economy also has some unfavorable factors, such as insufficient demand and downward pressure, it is still better than the overall situation in the US," Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Wednesday, noting that in addition to China's relatively bigger growth potential, "the country has also adopted a more responsible attitude in policymaking."

In the latest example, after a top tone-set meeting on July 24 stressed efforts to stabilize growth amid new challenges, Chinese authorities have in recent days announced a slew of measures to boost development in various areas, including the private sector and domestic consumption, to ensure steady economic recovery. With all the measures in place, China is likely to meet annual growth target, which means it will be the biggest contributor to global growth this year, analysts said.