The U.S.’s AAA rating will probably be cut by Fitch Ratings by the end of 2013 unless lawmakers are able to formulate a plan to reduce the budget deficit after next year’s congressional and presidential elections.
“Without such a strategy, the sovereign rating will likely be lowered,” New York-based Fitch said in a statement today. “Agreement will also have to be reached on raising the federal debt ceiling, which is expected to become binding in the first half of 2013.”
Fitch assigned a negative outlook on the U.S. in November after a congressional committee failed to agree on cuts. Fitch said its fiscal and economic projections imply that federal debt held by the public will exceed 90 percent of gross domestic product by the end of the decade in the absence of expenditure and tax reforms that would address the challenges of rising health and social security spending as the population ages. The high and rising federal and general government debt burden isn’t consistent with the U.S. retaining its AAA status even with its other fundamental sovereign credit strengths, Fitch said.
“The debt situation is a slow moving train wreck,” said Jason Brady, a managing director at Thornburg Investment Management Inc., which oversees about $73 billion from Santa Fe, New Mexico. “The risks are apparent, but the benefits or strengths are also apparent. The strength of the U.S economy, the strength of the U.S financial system, is more apparent right now.”
The U.S.’s probability of a downgrade is greater than 50 percent over two years, Fitch said Nov. 28 in a statement. Standard & Poor’s and Moody’s Investors Service said Nov. 21 that the so-called supercommittee’s inability to reach an agreement didn’t merit downgrades because the inaction will trigger $1.2 trillion in automatic spending cuts.
Treasuries have returned 4.1 percent since the S&P cut the U.S. to AA+ from AAA on Aug. 5, according to Bank of America Merrill Lynch index data.
The 12-member bipartisan committee, created in August by the Budget Control Act that raised the U.S. debt ceiling, reached an impasse amid Democrats’ opposition to reductions in programs such as Medicare and Republicans’ reluctance to increases in tax revenue.
--Editors: Dave Liedtka, Paul Cox
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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