U.S. Faces Fitch AAA Downgrade By End of 2013 Unless Deficit Cuts Made

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 budget cuts. The rating firm forecast federal public-debt will exceed 90 percent of gross-domestic-product by the end of the decade unless the government addresses rising health and social security spending through tax increases or reductions in expenditures.

“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.”

Downgrade Probability

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.

“The high and rising federal and general government debt burden is not consistent with the U.S. retaining its AAA status even with its other fundamental sovereign credit strengths,” Fitch said.

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 S&P 500 Index has gained 4.5 percent”

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.

“This is really the right thing to do, to talk about what the problems are, talk about this not being on the right pathway, but also recognize that this isn’t moving quickly and a lot can change between now and a year or two years,” Brady said. “The U.S. certainly has the ability to pay its debts.”

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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