Out-of-Control Government Borrowing Justifies Fitch’s US Rating Downgrade: Blackstone CEO

Blackstone CEO Steve Schwarzman said Friday that the decision by Fitch Ratings to downgrade the U.S. long-term credit rating is regrettable but justified, in large measure due to the out-of-control government spending that keeps adding the the federal debt load.

Steve Schwarzman, CEO of the Blackstone Group, participates in a Business Roundtable discussion in Washington, on Dec. 6, 2018. Mark Wilson/Getty Images

Blackstone CEO Steve Schwarzman said Friday that the decision by Fitch Ratings to downgrade the United States’ long-term credit rating is regrettable but justified, in large measure due to the out-of-control government spending that keeps adding the the federal debt load.

As head of a firm with around $1 trillion under management, Mr. Schwarzman told CNBC in a wide-ranging interview on Aug. 4 that the Fitch downgrade of America’s credit rating may have come as a surprise, but it’s not baseless.

“The numbers justify it, regrettably,” Mr. Schwarzman said. “We’ve had an explosion of debt since the global financial crisis. We don’t appear to have a lot of discipline.”

Mr. Schwarzman added that the country is now running “huge deficits” with no sign of fiscal discipline and “so on the numbers, you can understand why they did it.”

His remarks come several days after Fitch Ratings downgraded the Long-Term Foreign-Currency Issuer Default Rating for the United States from AAA to AA+. The rating cut means that U.S. government bonds are now a riskier investment than they were previously, raising the cost of government borrowing.

One of the immediate consequences of the Fitch ratings cut has been for billions of dollars in municipal bonds to be downgraded as well.

With the loss of its top sovereign credit rating, the United States has fallen behind Germany, Denmark, the Netherlands, Sweden, Norway, Switzerland, Singapore, Luxembourg, and Australia.

Treasury Secretary Janet Yellen has called the downgrade “entirely unwarranted” while the White House said it “strongly” disagrees with Fitch’s decision.

This was the second time in history the country’s AAA rating has been downgraded.

Amid a budget battle between Republicans in Congress and the Obama administration in 2011, Standard & Poor’s lowered the U.S. credit rating.

Treasury Secretary Janet Yellen testifies before the Senate Finance Committee on the proposed budget request for 2024, on Capitol Hill in Washington, on March 16, 2023. Andrew Caballero-Reynolds/AFP via Getty Images

‘Decline in Governance’

In justifying its downgrade decision, Fitch said there has been a steady deterioration in governance standards in the United States over the past two decades, including on issues of government spending and debt servicing.

Fitch said in its decision that it had lowered the U.S. credit rating because of “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” over the past 20 years.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch stated.

“In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process,” the rating agency added.

In May, Fitch placed the U.S. rating on negative watch, citing the debt ceiling deadlock on Capitol Hill that was prompted by a bitter partisan dispute over spending levels.

The down-to-the-wire standoff on raising the debt ceiling ended at the beginning of June when Congress passed the Fiscal Responsibility Act of 2023, which the nonprofit Committee for a Responsible Federal Budget estimated would yield roughly $250 billion in direct savings.

Despite a collective sigh of relief on the part of many in the Beltway and on Wall Street that the measure passed—raising the debt cap and letting the government continue to rack up debt—current government funding is set to hit another hurdle soon.

In December 2022, Congress enacted an omnibus funding bill for fiscal year 2023, which ends on Sept. 30, the date on which current government funding is set to expire.

With talks on the next government funding bill for fiscal year 2024 expected to get underway soon, spending levels are once again poised to be a hot button issue, just like they were around the debt ceiling showdown.

As the Sept. 30 deadline looms large, Sen. Joe Manchin (D-W.Va.) spoke of the coming talks on a new government funding bill with some trepidation.

“Now, more than ever, it is time for elected leaders from both parties to work together and send a clear message to the world that we will take the necessary fiscal and budgetary steps to restore our credit rating and keep America’s economy strong for this generation and the next,” he said in a statement.

‘Stark Warning’

Mr. Manchin called the Fitch downgrade a “stark warning” that must not be ignored, while urging his congressional colleagues to act now and address the national debt and fully fund the government.

“Every American will suffer if Washington politics get in the way of long-term solutions that address these challenges,” Mr. Manchin said.

By contrast, the decision by Fitch to downgrade the United States was met with a flurry of critical takes on the part of the Biden administration, with the White House blaming Republican “extremism.”

“It defies reality to downgrade the United States at a moment when President [Joe] Biden has delivered the strongest recovery of any major economy in the world,” White House press secretary Karine Jean-Pierre said in a statement.

“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,” she added.

Ms. Yellen on Wednesday criticized the Fitch downgrade, saying she found the decision baffling in light of the “strength” of the U.S. economy, which has been been a mixed picture as recessionary warning signs have been flashing red.

“Fitch’s decision is puzzling in light of the economic strength we see in the United States,” Ms. Yellen said during a speech at an IRS facility in McLean, Virginia.

“I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted.”

According to Ms. Yellen, the credit rating agency’s “flawed assessment” is based on old data and fails to incorporate changes in governance and other indicators since Mr. Biden took office.

However, there have been growing signs that the U.S. economy is in choppy waters and en route to more turbulence.

The latest recession watch data from The Conference Board—a compilation of forward-looking economic indicators called the Leading Economic Index—fell again in June, extending its decline for the 15th consecutive month, the longest streak of declines since the 2007–2009 financial crisis.

Justyna Zabinska-La Monica, a senior manager at The Conference Board, said in a statement that “June’s data suggests economic activity will continue to decelerate in the months ahead,” while forecasting that the U.S. economy will fall into a recession at some point in the third quarter of this year.

Ms. Zabinska-La Monica blamed high inflation, tighter monetary policy, and more difficult credit conditions for putting a damper on the U.S. economy.

Emel Akan contributed to this report.