Dimon Weighs In On Fitch Downgrade

Fitch Ratings’ decision to downgrade US government debt rattled global markets and sparked criticism in Washington and Wall Street after the credit agency cited a “steady deterioration in standards of governance” over the last two decades and an increase in the deficit this year.

Fitch cut the US’s sovereign credit grade one level from AAA to AA+. The downgrade reflects an erosion in confidence after repeated debt-limit political standoffs and last-minute resolutions and further fiscal deterioration given tax cuts and economic shocks.

The credit grader expects the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, “reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden,” it said on August 2. “These factors have contributed to successive debt increases over the last decade,” it said.

The downgrade comes two months after a bruising Congressional fight over the federal debt ceiling, which was ultimately raised. Fitch had warned at the time that it was weighing cutting the credit grade back when Democrat and Republican lawmakers were at odds over raising the borrowing limit and the Treasury was only weeks away from running out of cash.

JPMorgan Chase CEO Jamie Dimon said that he wasn’t concerned about the downgrade. "It doesn’t really matter that much," Dimon said during an interview with CNBC in Bozeman, Mont. "It's the markets that decide, not the ratings agencies that make these big decisions."

Global Markets

Global equity markets reacted negatively to the Fitch decision.

The S&P 500 declined 1.5%, while Japan’s benchmark Nikkei 225 (N225) index had its worst day of the year, ending down 2.3%, and Hong Kong’s Hang Seng (HSI) Index closed down 2.5%. Germany’s DAX (DAX) dropped 1.4% and France’s CAC (CAC40) 40 fell 1.2%, while London’s FTSE 100 (UKX) also hit a two-week low, down 1.5%.

Dimon emphasized that the credit of the US is "sound" and "should be the highest-rated credit in the world." It is "ridiculous" that countries such as Canada have higher credit ratings, he added. "This is the most prosperous nation on the planet. It's still the most prosperous nation on the planet."

The downgrade from Fitch Ratings “doesn’t really matter than much” because the markets decide the value of U.S. debt and other securities, not the ratings agencies, he added.

The downgrade has echoes of the past. In 2011, S&P Global Ratings downgraded the US one notch below AAA, saying at the time that "political brinkmanship" in the debate over the debt had made the U.S. government's ability to manage its finances "less stable, less effective and less predictable." The decision resulted in a nearly 20% drop in the S&P, which took roughly a year to recover, according to data in a newsletter from James Walter Wealth Management

When S&P downgraded the US more than a decade ago, the decision boosted Treasuries as investors sought out havens, and the bond market shrugged off the Fitch downgrade. Ten-year yields climbed toward the highest since November.

“I suspect the market will be in two minds about it - at face value, it’s a black mark against the US’s reputation and standing, but equally, if it fuels market nervousness and a risk-off move, it could easily see safe haven buying of US Treasuries and the dollar,” said David Croy, strategist at Australia & New Zealand Banking Group in Wellington. “It’s finely balanced.”

Biden Administration Responds

The Biden administration pushed back strongly against the decision. US Treasury Secretary Janet Yellen called the downgrade “arbitrary” and based on “outdated” data. The economy has recently shown signs of resilience and the debt limit was ultimately lifted, she said.

“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong,” Yellen said.

White House Press Secretary Karine Jean-Pierre said “it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world.”

The federal deficit hit $1.39 trillion for the first nine months of the current fiscal year, up some 170% from the same period the year before, Bloomberg reported. The Treasury boosted its borrowing forecast for the current quarter to $1 trillion, well above the $733 billion it had predicted in May.

Republican ‘Extremism’

Like most things in Washington, the downgrade became bipartisan. Biden’s re-election campaign spokesman Kevin Munoz and Jean-Pierre quickly blamed the Republic Party and former President Donald Trump for the downgrade.

"This Trump downgrade is a direct result of an extreme MAGA Republican agenda defined by chaos, callousness, and recklessness that Americans continue to reject," Munoz said, noting that Trump encouraged Republicans in Congress to "do the default" over the debt ceiling this year. Jean-Pierre pointed to “extremism by Republican officials” for the downgrade.

“From cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations’” the Republics are “a continued threat to our economy,” Jean-Pierre said.

Republicans said the downgrade was just another example of Biden’s mishandling of the economy. House Republican campaign spokesman Jack Pandol, on the social media platform X, formerly known as Twitter, said the cause of the downgrade was “Bidenomics”.

Fannie and Freddie

The next day, Fitch also downgraded the credit ratings of US mortgage giants Freddie Mac and Fannie Mae. The firm downgraded the mortgage giants’ Long-Term Issuer Default Ratings (IDR) and senior unsecured debt ratings from AAA to AA+.

The ratings agency said that as government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac benefit from implicit government support.

Fannie and Freddie, which guarantee about 70% of the country’s mortgages, do not directly issue mortgages to borrowers, but instead buy mortgages from lenders and repackage them for investors. They are chartered by Congress and regulated by the Federal Housing Finance Agency.

As of December 31, 2022, Fannie and Freddie – both of which have remained in government conservatorship since 2008 – had combined total assets of $7.5 trillion, representing 49 percent of the nation’s outstanding residential mortgage debt. From 2008 to 2022, the Federal Housing Administration’s annual market share of purchase loans ranged from 14.14 percent to 32.6 percent.

Downgrading the GSEs is a direct result of uncertainty about the United States fulfilling its debt obligations and concern about the level of support the housing GSEs can expect if the US rating were to drop.

Fitch noted that its action is not being driven by fundamental credit, capital or liquidity deterioration at the firms.

“Key rating drivers for aligning Fannie Mae’s and Freddie Mac’s ratings to the U.S. rating include their mission critical function to the U.S. housing finance system and the U.S. Treasury’s Senior Preferred Stock Purchase Agreements (SPSPAs),” the Fitch statement said.

It also said that should the US sovereign debt rating be raised, the GSEs’ rating would move in tandem.