Fitch: Rating Affirmed, but U.S. Lawmakers’ Ineffectiveness Foreshadows a 2013 Credit Downgrade

Though splashy mainstream media headlines read things like “Warning of U.S. Downgrade,” it is critical to point out that Fitch Ratings actually upheld the nation’s “AAA” credit rating Monday. However, the “big three” agency did note that continued ineffectiveness on the part of the U.S. Congress to break through partisanship to get things done, most importantly address a growing debt problem, could cause Fitch to move the needle by 2013. The odds of a formal downgrade were placed at just better than 50% by the firm itself, in fact.

While Fitch affirmed the U.S. sovereign credit rating, it did drop the long-term outlook to negative from stable. Fitch noted the U.S. continues to retain strong economic and credit fundamentals as well as a currency that is “the global benchmark.” It also asserted that the U.S. economic recovery likely would kick into a higher gear by early 2013 if not late next year. However, uncertainty regarding the recovery of employment levels, government spending and even effectiveness or competency of federal lawmakers are front of mind for ratings analysts at the firm:

“Fitch's revised fiscal projections envisage federal debt held by the public exceeding 90% of national income (GDP) and debt interest consuming more than 20% of tax revenues by the end of the decade and, including the debt of state and local governments, gross general government debt will reach 110% of GDP over the same period. In Fitch's opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its 'AAA' status…The Negative Outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. 'AAA' sovereign rating will be forthcoming following failure to agree at least $1.2 trillion of measures to cut the federal budget deficit over the next 10 years...The failure underlines the challenge of securing broad-based consensus on how to reduce the out-sized federal budget deficit."

Fitch, essentially accusing U.S. lawmakers of kicking the can down the road, also noted that automatic cuts, to be implemented if an agreement isn’t made by lawmakers charged with finding ways to reduce the debt, essentially are discretionary spending and, thus, would not be considered a “credible” move toward real debt reduction.

Brian Shappell, NACM staff writer

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