U.S. debt downgrade sinks global markets — but economists are not concerned

Global stock markets tumbled on Wednesday after ratings agency Fitch downgraded the United States’ long-term credit rating — but top economists say there is nothing to worry about.

Fitch announced late on Tuesday that it had cut the U.S. long-term foreign currency issuer default rating to AA+ from AAA, citing “expected fiscal deterioration over the next three years,” an erosion of governance in light of “repeated debt-limit political standoffs” and a generally growing debt burden.

U.S. stock futures were sharply lower after the downgrade, pointing to a fall of almost 300 points for the Dow Jones Industrial Average at the Wednesday open on Wall Street.

The pan-European Stoxx 600 index dropped 1.6% by mid-morning in London, with all sectors and major bourses trading deep into the red, while stocks in Asia-Pacific also plunged across the board overnight.

High-profile economists including former U.S. Treasury Secretary Larry Summers and Allianz Chief Economic Advisor Mohamed El-Erian lambasted the Fitch decision, with Summers calling it “bizarre and inept” and El-Erian “perplexed” by the timing and reasoning. Current Treasury Secretary Janet Yellen described the downgrade as “outdated.”

Goldman Sachs Chief Political Economist Alec Phillips was also quick to point out that the decision did not rely on new fiscal information and is therefore not expected to have a lasting impact on market sentiment beyond immediate shock selling on Wednesday.

Phillips said the downgrade “should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change.”

“Fitch’s projections are similar to our own — they imply a federal deficit of around 6% of GDP over the next few years — and Fitch cites CBO (collateralized bond obligation) projections in its medium-term outlook, so the downgrade…