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By Anna Skinner
Associate News Editor
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Texas Governor Greg Abbott on Tuesday celebrated that his state's credit rating is now higher than that of the U.S.
Earlier that day, Fitch Ratings downgraded its long-term credit rating for the U.S. from AAA to AA+. The downgrade came after a debt ceiling crisis that, although resolved, had politicians threatening a standoff that could have resulted in the nation defaulting on its debts. Fitch issued a statement after the rating drop citing concerns with the nation's growing debts and an incoming recession as reason to strip the U.S. of its exceptional rating.
Fitch is one of three major credit agencies that determine the U.S. rating. The other two companies are Standard & Poor's (S&P) and Moody's Investor Service. S&P's rating for the U.S. is AA+ and Moody's is AAA.
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Despite the cut to the nation's credit rating, Texas and several other states have maintained their top-tier grades.
"The U.S. rating was cut today to AA+ from the top ranking of AAA by Fitch Ratings. Texas has a better credit rating (AAA) than the U.S. We also rank #1 for jobs, exports, economic development & Fortune 500 HQs," Abbott, a Republican, tweeted on Tuesday.
Abbott cited a Fitch report about Texas in May that commended the state's "growing economy" and "ample fiscal flexibility."
Newsweek reached out to Abbott's press office by email for comment.
A state's credit rating showcases its ability to pay debts and reflects the strength of its economy. States with higher credit ratings have lower interest rates on debts such as general obligation bonds, which can be used to finance large projects like road construction. A positive rating has a trickle-down effect, as lower interest costs cause less of an impact on the taxpayer.
When a state's credit rating is slashed, interest rates increase and negatively impact the state's economy and the burden on taxpayers. The U.S. credit rating acts similarly but on a federal level.
"You can think of a credit rating as a report card for a country's economic responsibility," Itzhak Ben-David, a finance professor at Fisher College of Business at Ohio State University, told Newsweek. "If the country's rating is high [like AAA], financial experts believe it manages its money well and is a safe bet for lending money. If the rating drops [like going from AAA to AA+], it is like receiving a lower grade, and experts may see it as a sign that the country is not managing its money as well."
In the statement announcing the U.S. rating cut, Fitch criticized what it called standards of governance.
"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, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," the statement said.
It is only the second time in the nation's history that the AAA rating has been slashed. In 2011, S&P knocked down the U.S. credit rating one step to AA+. The nation has yet to recover its AAA rating from the S&P.
Although AA+ is still an exceptional rating with very low default risk, the downgrade has fueled concerns about the future of the U.S. economy. Inflation has started to steadily decline as the Federal Reserve issues each subsequent interest rate hike, but the hikes are hitting Americans with steep rates for loans. The hikes also have created challenges for the commercial real estate sector, in which some companies such as Starwood Capital Group have defaulted on their mortgages.
The downgrade in the U.S. credit rating could worsen the already-high interest rates plaguing borrowers for things like mortgages or car loans. However, considering the U.S. still has a favorable rating, Ben-David said the credit rating's impact to interest rates may not be immediate or substantial.
Despite Fitch criticizing the United States' "repeated debt-limit political standoffs and last-minute resolutions" as having "eroded confidence in fiscal management," the Biden administration defended its efforts to improve the economy and blamed Republicans for the stripped rating.
"The ratings model used by Fitch declined under President Trump and then improved under President Biden, and 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," White House press secretary Karine Jean-Pierre said in a statement released on Tuesday.
"And it's clear that extremism by Republican officials—from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations—is a continued threat to our economy."
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