Tuesday, January 15, 2013

Fitch: Play Nice, Washington

A report out from the ratings agency Fitch suggests that the company will downgrade the USA's AAA credit rating if Congress fails to raise the debt ceiling in a timely fashion:
Fitch Ratings' expectation is that Congress will raise the debt ceiling and that the risk of a U.S. sovereign default remains extremely low. Nonetheless, and in line with our previous guidance, failure to raise the debt ceiling in a timely manner will prompt a formal review of the U.S. sovereign ratings. On 31 December 2012, U.S. federal government debt reached the statutory debt limit of USD16.394trn and consequently the Treasury has begun to implement extraordinary measures that will create an estimated USD200bn of additional headroom under the debt ceiling. A repeat of the August 2011 'debt ceiling crisis' would oblige Fitch to review its current assessment of the reliability and predictability of the institutional policy framework and prospects for reaching agreement on a credible medium-term deficit reduction plan.
In Fitch's opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.
So a refusal by Congressional Republicans to raise the debt ceiling and strike a deal with the president could cause the ratings agency to lose faith in America's abilities to pay its bills.

 But there's a warning for the president, too:

The U.S. 'AAA' status is underpinned by the country's relative economic dynamism and potential, diminishing financial sector risks, respect for the rule of law and property rights, as well as the exceptional financing flexibility that accrues from the global benchmark status of U.S. Treasury securities and the dollar. These fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt.
In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current Negative Outlook on the 'AAA' rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted. 

So Fitch (and no doubt others) are looking for a plan to reduce the deficit's burden in the medium term.  It's not demanding immediate cuts, but it is looking for a more positive trajectory.  Cooperation from both parties may be required to realize this trajectory.

1 comment:

  1. This whole blog is written with unique ideas. It fully covered and explains the different tragedies happen in government sector and give the information about the steps taken by them related to this matter. Thank you for sharing this knowledgeable information with public.

    supplemental health insurance