Fitch Reiterates U.S. Downgrade Likely on Debt Ceiling Crisis

Fitch Ratings reiterated that another so-called debt ceiling crisis would probably lead to a reduction in the U.S. credit rating.

“The debt ceiling limit which comes back into force on May 19, certainly if that wasn’t addressed in a timely fashion, we don’t think another debt ceiling crisis like we had in August 2011 would be consistent with the U.S. retaining its AAA rating,” David Riley, managing director of sovereign ratings, said on Bloomberg Surveillance in an interview with Sara Eisen.

Congress suspended the U.S. debt ceiling until May 18. Failure to increase the limit “in a timely manner,” which Fitch said it doesn’t expect to happen, “would prompt a review and likely downgrade of the U.S. sovereign rating,” the company said in a statement Feb. 27.

Federal spending will be reduced by $85 billion in the final seven months of the fiscal year ending Sept. 30 and by $1.2 trillion over the next nine years in automatic cuts set to start before midnight known as the sequester after lawmakers failed to reach agreement on budget reductions. Fitch has had a negative outlook on the U.S.’s AAA ranking since 2011.

Treasuries rallied after Standard & Poor’s stripped the U.S. of its top ranking on Aug. 5, 2011, with yields touching a record low 1.379 percent in July 2012. U.S. government debt gained 9.8 percent in 2011, the most in three years, according to Bank of America Merrill Lynch index data. S&P and Moody’s Investors Service, which assigns the U.S. its top Aaa ranking, have negative outlooks on the America’s credit rating.

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December on Moody’s and S&P grades.

Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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