Fitch Ratings Confirms U.S. AAA Credit Rating, Giving a Vote of Confidence to Washington's Deficit-reduction Efforts

Fitch Affirms U.S. AAA Rating, Disagrees with S&P

August 16, 2011

Reuters - Fitch Ratings on Tuesday confirmed the United States' top-notch credit rating and, in blatant disagreement with rival Standard & Poor's, gave a vote of confidence to Washington's deficit-reduction efforts.

Fitch also kept a stable outlook on its U.S. AAA rating, less than two weeks after S&P downgraded the United States to AA-plus with a negative outlook.

The agency said, however, that it will revisit its decision at the end of the year. It threatened to slap a negative outlook on the rating at that time if lawmakers fail to implement the $2.1 trillion (1.2 trillion pounds) in savings that were agreed earlier this month or if the economy deteriorates significantly.

An outright one-notch downgrade is not ruled out, but less likely, the agency said in a statement. A negative outlook usually means a downgrade is possible in two years.

The acrimonious political battle that preceded the debt agreement in Washington -- and which took the country to the brink of default -- was one of the main reasons why S&P decided to downgrade the United States on August 5.

But Fitch said the debt deal, whose specific deficit-reduction measures need to be agreed by a bipartisan congressional committee, showed lawmakers can achieve sufficient political consensus to tackle the nation's debt problems.

Additional $2 trillion in savings would be needed to put U.S. debt ratios on a downward path over the next ten years, said David Riley, Fitch's top analyst for the United States.

If lawmakers are able to implement the initial $2.1 trillion in savings, that will prove that Fitch is right to believe that "U.S. public and political support to deficit reduction can translate into action," he told Reuters in an interview.

"In terms of the joint select committee, why prejudge the outcome of that when we'll know the outcome in three-and-a-half or four-month time?" Riley said.

Fitch also said the U.S. AAA rating is underpinned by key pillars: the country's pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides the country's revenue base.

Monetary and exchange rate flexibility enhance the capacity of the economy to absorb and adjust to shocks, it noted.

S&P ALONE

After Fitch's rather positive view on the United States, Standard & Poor's stands more lonely than ever in its decision to downgrade the country.

Moody's Investors Service stands in the middle. The agency confirmed the U.S. AAA rating earlier this month with a negative outlook, threatening to downgrade it in the next two years for the same reasons Fitch raised -- if Congress doesn't fully implement the agreed $2.1 trillion in savings or if the economy falls into recession.

"S&P had a very specific basis for their concern, which was that there was no long-run plan for budget control," said Pierre Ellis, senior economist with Decision Economics in New York.

"Fitch is putting a little more faith in the common sense of Congress and the administration with respect to getting the budget situation under control," he added.

In a statement issued after Fitch's decision, the U.S. Treasury Department stressed the need for further action by lawmakers.

"The Treasury Department continues to believe that Treasury securities are AAA investments. Today's report underscores the importance of Congress taking additional actions to address our long-term fiscal challenges," Treasury spokesman Anthony Coley said.

Financial markets showed little reaction to the news, traders said. Ten-year U.S. Treasury notes rose a point in price later on the day as investors worried about the European debt crisis continued to see U.S. bonds as a safe haven.

ECONOMY AT A TIPPING POINT

Another key element in Fitch's review of U.S. ratings later this year will be the state of the economy.

Fitch recently revised down its growth economic forecasts for the United States -- to 2.9 percent between 2012 and 2016 and to 2.4 percent between 2017 and 2021. Those estimates are based on the fact that the United States has "plenty of spare capacity" to support a faster economic scenario, said Riley. He acknowledged, however, that those estimates are "very uncertain."

"We think we will be better placed towards the end of this year to judge the near term economic outlook -- either this soft patch is a soft patch or the U.S. economy is going into stagnation or potentially even into recession," he said.