Photo: (AP Photo/Thomas Kienzle)
Fitch Ratings just confirmed the United States’ long-term issuer rating, but kept its ratings outlook negative.The ratings agency lauded the U.S. for its “highly productive, diversified and wealthy economy; monetary and exchange rate flexibility; and the exceptional financing flexibility afforded by the global reserve currency status of the U.S. dollar.”
However, it wrote that continuing uncertainties emanating from U.S. fiscal policy and the European debt crisis pose major downside risks. In particular, the country continues to face a “lack of broad public and political agreement on how to secure deficit reduction.”
Link to Fitch Ratings’ Report: US Fiscal Outlook – Mired in Uncertainty
Fitch Ratings-New York/London-10 July 2012: Fitch Ratings has affirmed the United States (U.S.) long-term foreign and local currency Issuer Default Ratings (IDRs) and Fitch-rated U.S. Treasury security ratings at ‘AAA’. Fitch has also simultaneously affirmed the U.S. Country Ceiling at ‘AAA’ and the short-term foreign currency rating at ‘F1+’. The Rating Outlook on the long-term rating remains Negative.
The affirmation of the U.S. ‘AAA’ rating is underpinned by its highly productive, diversified and wealthy economy; monetary and exchange rate flexibility; and the exceptional financing flexibility afforded by the global reserve currency status of the U.S. dollar. Fiscal and macroeconomic risks emanating from the financial sector are moderate and diminishing. The U.S. sovereign credit profile also benefits from the respect for property rights, the rule of law and high degree of political and social stability.
Fitch’s current assessment is that the weak recovery reflects the gradual rebalancing of the economy, notably the unwinding of excessive household debt and the housing market correction, rather than a permanent downshift in the potential growth rate of the economy. With household debt falling towards pre-crisis levels, the housing market beginning to stabilise and healthy corporate sector finances, Fitch expects the economic recovery to gradually accelerate into 2013 and 2014 and over the medium term, Fitch projects the economy to expand at an annual average rate of around 2.5%.
The risks to the forecasts are mostly to the downside in light of the uncertainty regarding U.S. fiscal policy and the European debt crisis and recession. Moreover, the space for significant U.S. fiscal and monetary policy stimulus is much diminished. Additional information is available in Fitch’s May 2 special report, ‘Gauging the Benefits, Costs and Sustainability of US Stimulus’, available at ‘www.fitchratings.com’.
Following the failure of the Congressional Joint Select Committee on Deficit Reduction (‘the Supercommittee’) to reach agreement, Fitch revised the Rating Outlook for the United States to Negative from Stable on Nov. 28 2011. This was primarily due to Fitch’s diminished confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path would be forthcoming.
The Negative Outlook also reflects the risks associated with the lack of broad public and political agreement on how to secure deficit reduction. The uncertainty over tax and spending policies associated with the so-called ‘fiscal cliff’ weighs on the near-term economic outlook. A 5% of GDP fiscal contraction in 2013 implied under current law would, if permanent, push the US into an unnecessary and avoidable recession. Moreover, the burden of government debt on the economy will continue to rise with potentially adverse implications for potential growth as well as increasing the risk of a fiscal crisis if agreement is not reached on reducing the budget deficit and addressing the long-term fiscal challenges associated with rising health care costs, an ageing population and a narrow and volatile tax base.
In Fitch’s opinion, it is likely that all or some of the tax increases and spending cuts implied under current law will be voided or at least temporarily deferred. Fitch’s fiscal and economic forecasts are premised on a reduction in the federal budget deficit of around 1.5% of GDP in 2013 rather than the 3% to 5% contraction implied by the ‘fiscal cliff’. Consequently, Fitch forecasts the U.S. economic recovery to accelerate to 2.6% in 2013 from 2.2% this year and unemployment to fall below 8%. Fitch’s ‘Global Economic Outlook, New Threats and Old Risks’ report from June 15 goes into more detail.
The debt ceiling will likely become binding from mid-November, though the Treasury Secretary can deploy ‘extraordinary measures’ to extend the Treasury’s borrowing authority into early 2013. Fitch continues to judge that the risk of a payment default on a Treasury security arising from operation of the debt ceiling to be extremely low. Nonetheless, last-minute agreements to raise the debt ceiling and regular threats of payment default threaten the U.S. ‘AAA’ rating. A repeat of the August 2011 ‘debt ceiling crisis’ would prompt Fitch to review the U.S. sovereign rating, as discussed in Fitch’s special report, ‘US Fiscal Outlook – Mired in Uncertainty’, published today and also available at ‘www.fitchratings.com’ or by clicking on the above link.
The low cost and security of fiscal funding are key credit strengths and imply that the U.S can support a higher debt burden relative to its ‘AAA’ and high-grade peers. The profound benefits that accrue from the US dollar’s status as the world’s reserve currency and Treasury securities as the global benchmark fixed-income instrument mean that the U.S. can minimise the output and employment costs of fiscal consolidation with a gradualist reform-orientated approach. But the absence of market pressure also renders it easier to defer and avoid difficult choices on tax and spending necessary to stabilise government debt to GDP ratio over the medium-term and ensure fiscal space to absorb future shocks.
Including the debt of state and local governments as well as that of the federal government, gross general government debt is equivalent to 103% of GDP (and 96% on a comparable basis with highly-rated European sovereign peers), the highest level of indebtedness of any Fitch-rated ‘AAA’ sovereign and double the current ‘AAA’ median of less than 50%. Federal debt held by the public stands at 70% of GDP compared to a current ‘AAA’ median for central government debt to GDP of 43%, though it is similar to that of France (rated ‘AAA’ with a Negative Outlook by Fitch) and much less than the 85% of GDP for the U.K. (rated ‘AAA’ with a Negative Outlook).
Fitch currently projects federal debt held by the public and gross general government debt to reach 79% and 108% of GDP respectively by 2014. On current policies, Fitch projects the federal budget deficit to stabilise at between 4% and 5% of GDP from 2014-15. Under current assumptions regarding economic growth and interest rates, this would be insufficient to prevent government debt to GDP ratio from continuing to rise over the medium to long-term. More information is available in Fitch’s Dec. 21, 2011 special report, ‘U.S. Public Finances – An Update’.
Absent material adverse shocks, Fitch does not expect to resolve the Negative Outlook until late 2013. Fitch will take into account any deficit-reduction strategy that may emerge after Congressional and Presidential elections in addition to an updated assessment of the medium-term economic and fiscal outlook. Agreement on a multi-year deficit reduction plan that would stabilise government indebtedness and secure confidence in the long-run sustainability of public finances would likely result in Fitch affirming U.S. ‘AAA’ status and revising the Rating Outlook to Stable. Conversely, failure to secure agreement on deficit-reduction that implies a continuing rise in government indebtedness over the remainder of the decade would likely result in Fitch downgrading the U.S. sovereign rating.
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