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Fitch warns it may downgrade US

Wednesday, January 16, 2013    

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LONDON, England - The United States could lose its top credit rating for the second time from a leading agency if there's a delay in raising the country's debt ceiling, Fitch Ratings warned yesterday.

Congress has to increase the country's debt limit, which effectively rules how much debt the US can have, by the end of February or face a potential default, Fitch says.

There are fears that the debate will descend into the sort of squabbling and political brinkmanship that marked the last effort to raise the ceiling in the summer of 2011. Outgoing US Treasury Secretary Timothy Geithner warned then that it had nearly reached a point where government would be unable "to meet our commitments securely."

"The pressure on the US rating, if anything, is increasing," David Riley, managing director of Fitch Ratings' global sovereigns division said at a London conference. "We thought the 2011 crisis was a one-off event .... if we have a repeat we will place the US rating under review."

If that happens, Riley said there was "a material risk" of the rating coming down.

If Fitch does move to downgrade the US, it will join Standard & Poor's, which was so concerned by the dysfunctional nature of the 2011 debate that it stripped the US of its triple A rating for the first time in the country's history.

Fitch already has a negative outlook on the US as the country's debt burden has risen to around 100 percent of its annual gross domestic product, and has said it will make a decision on the rating this year, regardless of how the debt ceiling discussions pan out.

The US government reached its statutory debt limit of nearly US$16.4 trillion at the end of 2012 but is pursuing some extraordinary measures and can use some in-house deposits that should see it through to the end of February, according to Fitch.

Another major ratings agency, Moody's, also has a negative view on the US outlook.

Riley's comments come just two weeks after US lawmakers agreed to a budget deal with the White House that avoided the so-called fiscal cliff of automatic tax increases and spending cuts that many economists thought could plunge the US economy, the world's largest, back into recession. Relief that a deal was cobbled together, albeit at the final hour, is one of the reasons why sentiment in the financial markets has been buoyant in the first trading days of the new year. Many stock indexes around the world are trading at multi-year highs.

"The 'fiscal cliff' bullet was dodged .... (but it's) a short-term patch," said Riley.

Riley warned that the different arms of the US government still have a number of issues to address. As well as increasing the debt ceiling, they have to agree to spending cuts that were delayed as part of the "fiscal cliff" agreement and back measures to avoid a government shutdown, potentially in March.

Though short-term fixes are more likely than not, Riley said the US political environment is not as good as it should be for a country holding the gold-chip AAA rating. The past few years, Riley said, have been marked by "self-inflicted crises" between deadlines.

Overall, Fitch reckons the debt ceiling is "an ineffective and potentially dangerous mechanism for enforcing fiscal discipline."

The major reason behind the lack of swift action in the US is that the Democrats control the White House and the Senate, while the Republicans have a solid majority in the House of Representatives. Both sides have differing visions of the role of the state in society and often varying political objectives.

Despite his cautious tone on the rating, Riley said the US has a number of huge advantages and that getting the country's public finances into shape will not require the same level of austerity that many countries in Europe have had to enact over the past few years, partly because the US economy is growing at a steady rate.

Other factors Fitch says support the US's AAA rating are the country's economic dynamism, lower financial sector risks, the rule of law as well as the global benchmark status of the country's bonds and the dollar.

However it says these "fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt."

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