Fitch Says U.S. Could Lost 'AAA' Rating In 2013 If Budget Isn't Dealt With

Given that the ratings agencies appear to be acting under the premise that a downgrade a day will keep the wolves away from their door for botching the mortgage mess and helping to create the credit crisis in the U.S. a couple years back, Fitch yesterday released a report saying that it may downgrade the credit rating of the U.S. by the end of 2013 unless a plan to cut the budget deficit is developed.

Fitch says that unless lawmakers in Washington can come up with a credible plan to cut the burgeoning budget deficit in the U.S., it will be forced to downgrade their current AAA rating.

Fitch Ratings published a Special Report Wednesday afternoon titled, 'U.S. Public Finances - An Update' in which the firm details the medium-term fiscal projections that underpinned Fitch's revision of the United States 'AAA' sovereign Rating Outlook to Negative from Stable on Nov. 28, 2011.

In the report, Fitch makes it clear that the onus to avoid a downgrade is on Washington and that lawmakers must get serious about the cutting budget deficit. “Without such a strategy, the sovereign rating will likely be lowered,” Fitch said in its report Wednesday. “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 said that the summer debacle over the budget and the not-so Super-committee’s failure to come up with any cuts means the situation is getting worse not better.

Fitch writes, “By postponing the difficult decisions on tax and spending until after the forthcoming Congressional and Presidential elections, the scale and pace of required deficit reduction will consequently be greater. Even under optimistic economic and fiscal policy assumptions, Fitch believes that at least $3.5 trillion of additional deficit reduction measures will be required to stabilize federal debt (held by the public) at around 90% of GDP in the latter half of the current decade.”

Although the “standards” required by any of the ratings agencies for their AAA ratings is surely questionable after the three companies rubber-stamped their top ratings on subprime mortgage bonds during the 2005-2007 period, Fitch says that if the U.S. doesn’t start making some changes, the country would no longer meet the requirements of an AAA rating.

Fitch said Wednesday that the “latest fiscal and economic projections imply that federal debt held by the public will exceed 90% of GDP by the end of the decade. Federal debt will rise 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 is not consistent with the U.S. retaining its 'AAA' status despite its other fundamental sovereign credit strengths.”

In terms of chances of a Fitch downgrade of the U.S. rating, Fitch says that the probability at the present time is greater than 50% over the next two years.

 

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