Fitch reaffirms AAA rating for U.S., doesn't anticipate downgrade
The firm, one of the three major credit rating companies, said the outlook for the U.S. rating was stable because the recent deal to raise the debt ceiling and cut the budget deficit showed the nation's political leaders could do what's necessary to reduce the nation's soaring debt.
The debt-ceiling deal signed by President Obama last week "was a significant positive development that provided a substantive and necessary increase in the federal debt ceiling. It also signaled that there is the political commitment to place U.S. public finances on a sustainable path consistent with the U.S. sovereign rating remaining ‘AAA’," Fitch said in a report.
Fitch has the most positive outlook on the U.S. of the major credit rating companies. Standard & Poor's downgraded the U.S. long-term debt to AA+ this month after deciding the planned $2.1 trillion to $2.4 trillion budget cuts over the next decade were not enough to stabilize the nation's rising debt.
Moody's Investor Services, like Fitch, retained its AAA rating for the U.S. this month, but changed its outlook to negative. That means there's a risk of a downgrade.
Fitch reaffirmed its AAA rating for the U.S. shortly after the debt-ceiling deal, but said it would decide by the end of August if it would change its outlook to negative. But after two weeks of analysis, the company decided the budget cuts in the deal were enough to stabilize the U.S. debt burden at about 85% of total economic output by the middle of the decade.
While that would be "substantially higher" than any other AAA-rated company, Fitch said the U.S. benefits from the dollar and U.S. Treasury securities both being global benchmarks.
Still, Fitch warned that the country "is at the limit of the level of government indebtedness that would be consistent with the U.S. retaining its ‘AAA’ status despite its underlying strengths." And the company said a downgrade could come if the special congressional "super committee" charged with finding $1.5 trillion in budget cuts this fall isn't able to reach an agreement.
Even though there would be $1.2 trillion in automatic spending cuts if the committee can't agree, Fitch said that would be a bad sign for Washington's ability to deal with the debt situation.
"If agreement is reached and passed into law, it would demonstrate that a political consensus can be forged on deficit reduction and provide a platform for additional measures required in the medium term,'' Fitch said.
"In the event that the Joint Select Committee is unable to reach an agreement that can secure support from Congress and the administration, Fitch would be less confident that credible and timely deficit-reduction strategy necessary to underpin the U.S. ‘AAA’ sovereign rating and stable outlook will be forthcoming despite the ($1.2 trillion ) of automatic cuts that would follow."
-- Jim Puzzanghera
Photo: Fitch Ratings office in London. Credit: Bloomberg