Fitch Ratings, one of the world’s leading credit rating agencies, announced on August 1, 2023, that it had downgraded the U.S. government’s long-term foreign-currency issuer default rating. This decision, which has been closely watched by investors and analysts alike, has sparked a flurry of discussions about its potential implications, especially for the cryptocurrency market.
Fitch Ratings’ decision to downgrade the U.S. government’s credit rating was not taken lightly. The agency cited multiple concerns that led to this decision. Primarily, the anticipated fiscal deterioration over the next few years, coupled with an escalating general government debt burden, were significant factors. The agency also highlighted concerns about declining governance standards in the U.S., pointing to repeated debt limit standoffs and last-minute resolutions over the past two decades. Such events have, according to Fitch, eroded confidence in the U.S.’s fiscal management capabilities.
Furthermore, the absence of a medium-term fiscal framework, a feature present in many of its peers, and a convoluted budgeting process have only added to these challenges. Fitch’s projections indicate that the U.S. general government deficit could rise to 6.3% of GDP in 2023, a significant jump from 3.7% in 2022. This increase is attributed to weaker federal revenues, new spending initiatives, and a growing interest burden. Despite some recovery from the pandemic-induced high debt-to-GDP ratio of 122.3% in 2020, the current level of 112.9% remains considerably above the pre-pandemic 2019 level of 100.1%. Fitch anticipates this ratio to climb further, reaching 118.4% by 2025.
Last week, Marcel Pechman, a respected crypto analyst and a writer for Cointelegraph, weighed in on the potential ramifications for the cryptocurrency market, particularly Bitcoin.
He emphasized that this downgrade is more than just a numerical shift; it’s a clear indication of waning trust in the U.S. government’s fiscal prowess.
Post-downgrade, Pechman observed a noticeable shift in investor behavior. Traditional assets, including stocks, silver, and oil, saw reduced interest. Instead, there was a discernible pivot towards what many consider ‘safe havens’ in tumultuous times: cash and short-term financial instruments.
Yet, despite the downgrade, the cost to insure U.S. sovereign debt against potential default remained surprisingly stable. Pechman postulates that this could be attributed to the global perception of U.S. Treasurys. They’re often seen as one of the most secure investments, primarily because they come with the U.S. government’s backing.
However, Bitcoin didn’t seem to enjoy the same stability. The cryptocurrency found itself grappling with the aftershocks of the downgrade. Pechman noted that during initial market upheavals, there’s a tendency for investors to prioritize immediate liquidity, often sidelining the inherent benefits of decentralized assets like Bitcoin.
He further elaborated on potential liquidity challenges, posing a thought-provoking question: What would be the fallout if the U.S. government decided to withhold the yield on its debt, especially the portion held by major stakeholders like China?
Additionally, Pechman touched upon recent findings from the European Union bank stress test. The test, which encompassed 70 banks (making up about 75% of the EU’s banking assets), identified three institutions that didn’t meet the mark. While the vulnerabilities of Credit Suisse and Silicon Valley Bank were somewhat anticipated, the speed at which investor confidence in these banks deteriorated caught many off guard.
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