Fitch warns of U.S. downgrade if no budget deal

Ratings agency Fitch gave the United States some good news and some bad news Monday.

The firm announced it was keeping the credit rating on U.S. sovereign debt at AAA, or its top rating, but revised its outlook on the country to negative, warning a downgrade could come in 2013 if an agreement on debt is not reached.

“The affirmation of the U.S. ‘AAA’ sovereign rating reflects still strong economic and credit fundamentals,” Fitch said in its release. The agency warned, however, that the failure of the so-called U.S. ‘supercommittee’ on debt has created a loss of confidence.

The supercommittee, officially referred to as the Congressional Joint Select Committee on Deficit Reduction, announced last week that it had failed to come to an agreement on US$1.2-trillion in budget cuts over the next 10 years. That means that automatic budget cuts of US$1-trillion are set to go into effect.

“The failure of the JSCDR underlines the challenge of securing broad-based consensus on how to reduce the out-sized federal budget deficit,” Fitch said.

The ratings agency added that if a medium-term debt agreement was reached following the 2012 elections, downgrade pressure on the U.S. debt rating may ease.

But Fitch warned that failure to reach a credible deficit reduction plan by 2013 would likely lead to a U.S. downgrade.

‘The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon.,” Fitch said. “Fitch will shortly publish its revised economic and fiscal projections for the U.S. and will conduct a further review of its sovereign ratings in 2012.”

Fitch does not expect a change in the negative outlook until at least 2013, following U.S. elections and the emergence of any new deficit reduction plans.

Either way, U.S. lawmakers are likely breathing a sign of relief that Fitch will not be changing the country’s AAA credit rating. A downgrade by rival ratings agency, Standard & Poor’s, in August of this year set off a market roller coaster. While that downgrade did not impact U.S. Treasurys as was expected, it nevertheless hurt investor confidence, as evidenced by steep declines in U.S. stock indices in the following days.

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