- On 1 August Fitch cut the rating on US debt from AAA to AA+.
- The agency cited fiscal deterioration and the repeated clashes over the debt ceiling.
- No issuer is untouchable: diversification across issuers, maturities and currencies remains a basic tool.
On 1 August 2023 the agency Fitch cut the rating on US debt from AAA to AA+, citing fiscal deterioration and the repeated clashes over the debt ceiling. The news came a few weeks after the latest political standoff over that limit had been settled.
The decision was mostly symbolic in value, because US debt remains one of the most sought after in the world. But it forced many investors to reflect on a deeply rooted idea: that there is a completely risk-free asset. The rating was a reminder that even the soundest issuers are subject to an assessment of their management. Investors followed the news closely, although the market reaction was contained: US debt remained a highly sought-after asset, and the downgrade did not alter its role as a world reference.
What Fitch decided
The move from AAA to AA+ has a specific meaning. A credit rating is an agency’s opinion on an issuer’s ability to repay its debt; AAA is the highest level on the scale.
Rating agencies publish these grades to help investors assess issuers’ risk. They are not infallible, and their decisions can come late or be disputed, but they serve as a reference in debt markets. A downgrade indicates that, in the agency’s opinion, the risk has increased, even if only moderately. The rating scale runs from the highest, with minimal risk, to levels that indicate a high risk of default. Moving from AAA to AA+ is a small step on that scale, but it carries a strong symbolic component. Some institutional investors have internal rules that limit holdings of assets according to their rating, so these changes can have technical consequences even if perceived risk does not change much.
The reasons
Among the reasons for the downgrade was fiscal deterioration, together with the political clashes over the borrowing limit. That is, not just the volume of debt, but also the political difficulty of managing it, which had been evident a few months earlier.
This nuance is important: the ability to repay a debt depends not only on a country’s wealth, but also on the reliability of its institutions to take decisions in time. A system that repeatedly goes to the brink of default, even if it finally avoids it, conveys an image of lower predictability. Agencies also look at governance: the capacity of institutions to set priorities, approve budgets and manage crises. Conflict-ridden political management can weigh as much as deficit figures in a final assessment.
What the episode teaches
No issuer is untouchable. The downgrade had little immediate effect, but it recalled that the asset considered ‘risk-free’ also has limits. For anyone managing wealth, the lesson is that no investment is absolutely safe and that diversification across issuers, maturities and currencies remains a basic tool.
It is worth understanding what risk is being taken in each product, even those considered soundest, and not basing decisions on a single label. This is not a recommendation to buy or sell: it is an invitation to read the terms of each investment carefully and to review them periodically with an adviser. A well-built portfolio includes issuers of differing nature and origin, so that a change in one of them does not determine the overall result. That does not require complicating the structure, only checking that there are no hidden concentrations. It is also advisable to review periodically the ratings of the issuers one invests in and to understand what they mean, without treating them as proof that the investment is safe or as an automatic alarm signal.
A credit rating is a guide, not a guarantee.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
