Frightening Global Stock Markets on "Black Wednesday"! Fitch: Downgrade Reflects Doubts about US Government's Governance Capability

After causing a global market shock, controversial center Fitch Ratings stated that "governance erosion" led to the agency's downgrade of the United States' credit rating.

On Wednesday, following Fitch's downgrade of the US sovereign credit rating, global markets experienced a "Black Wednesday" with a widespread decline from the Asia-Pacific and European stock markets to the US stock market. The VIX panic index soared.

The Hang Seng Index fell nearly 2.5%, the Nikkei 225 Index dropped 2.3%. The FTSE 100 Index hit a two-week low, marking the largest single-day decline in nearly four weeks. The German DAX Index and the French CAC Index both fell by about 1.3%. The Nasdaq Composite Index plummeted over 2%, marking its worst single-day performance since February this year, while the Dow Jones Industrial Average ended its three-day rally and the S&P hit its lowest level since July 14.

Richard Francis, a senior executive at Fitch Ratings, told Reuters that part of the reason for this decision is their lack of confidence in the United States' ability to address fiscal and debt issues, and the governance situation in the United States is deteriorating.

He said that before the downgrade, Fitch Ratings had held meetings with the US Treasury Department and emphasized this deterioration in the discussions, which is reflected in the increasing polarization between the two parties and the "Capitol Hill riot" that occurred on January 6, 2021:

You have the debt ceiling, and you have January 6th. Obviously, if you look at the polarization between the two parties... the Democrats are more left, the Republicans are more right, so the center has basically collapsed.

The reason we emphasize this is because it is just a reflection of the deterioration of government governance, and it is just one of many problems.

Fitch Ratings downgraded the US credit rating to AA+ on Tuesday, marking the second time in history that a major institution has downgraded the US rating. The first time was during the debt ceiling dispute in 2011, when Standard & Poor's downgraded the US AAA rating.

In the report explaining the decision to downgrade the rating, Fitch analysts wrote:

In Fitch's view, governance standards in the United States, including fiscal and debt issues, have been steadily deteriorating. The recurring political deadlock over the debt ceiling and last-minute resolutions have weakened people's confidence in fiscal management.

In addition, Fitch also expects the Federal Reserve to further raise interest rates by 25 basis points in September, pushing the federal funds rate to a range of 5.5% to 5.75%. The agency also pointed out that due to tightening credit conditions, weak business investment, and slowing consumption, the US economy may experience a "moderate" recession in the fourth quarter of this year and the first quarter of next year. Fitch's decision has sparked strong reactions from US officials. Former US Treasury Secretary Larry Summers described this decision as "absurd" in an interview with Bloomberg.

Prior to this, Treasury Secretary Yellen criticized the decision as "arbitrary and based on outdated data."

Jared Bernstein, White House economic advisor, expressed that Fitch's timing of downgrading the US credit rating is unreasonable, calling the decision "peculiar and arbitrary":

Fitch seems to be punishing the person who is cleaning up the room, while the person who made the mess has long gone.