Fitch Ratings said the U.S. is under a review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating.
The firm said it expects to complete the ratings review by the end of August given the approval today of debt-limit compromise that prevents a U.S. default. Standard & Poor’s and Moody’s Investors Service Inc. also have the U.S. under review for possible downgrades.
“Although the agreement is a good first step in adjusting the fiscal challenges that the U.S. faces, it is just a first step,” David Riley, Fitch’s London-based head of sovereign ratings, said in a telephone interview. “Does it mean that the AAA rating is completely secure of the medium term? No.”
The U.S. must confront “tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut,” Fitch said in a statement today. The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any country with an AAA ranking, Fitch said in April.
President Barack Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.
No Magic Bullet
The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan yesterday.
“This agreement, we think, is a net positive,” Riley said. “It’s not a magic bullet in terms of the rating. The near-term risks to the U.S. AAA from Fitch are not high.”
A downgrade would raise the specter that the wrangling between Obama and Republican lawmakers over spending cuts and taxes will harm American prestige and the global financial system. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. It could also hurt the rest of the U.S. economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries.
Still, U.S. bonds and the dollar have signaled increased demand for the assets of the world’s largest economy even with the prospects of losing the AAA rating rising as the debt talks extended to the deadline when the Treasury said it would exhaust its ability to borrow.
Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.
Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.
Ten-year Treasury yields fell to as low as 2.63 percent today in New York, the least since November. The dollar represents 60.7 percent of the world’s currency reserves, compared with the 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.
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