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U.S. Warned by Fitch on Fiscal Cliff; Moody’s Stands Pat

Fitch Ratings warned that the U.S. may be downgraded next year unless lawmakers avoid the so-called fiscal cliff and raise the debt ceiling in a timely manner, while Moody’s Investors Service said it will wait to see the economic impact should the nation experience a fiscal shock.

Congress and President Barack Obama must confront more than $600 billion in tax increases and spending cuts set to take effect in 2013 or risk the economy tipping back into recession. Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, 2011, after months of political wrangling that pushed the nation to the deadline an agreement to lift the debt ceiling.

The U.S. rating depends on “a stabilization and then a downward trend in the ratio of federal debt” to gross domestic product next year, according to a Moody’s statement. Fitch also said that the nation may lose its AAA ranking next year if the government fails to reduce the deficit.

Moody’s would likely “await evidence that the economy could rebound from the shock” of the U.S. falling off the fiscal cliff before considering restoring the nation’s stable outlook from negative, according to the company’s statement.

“It’s simply not our task to tell people to dispense with the political circus or go about it in a certain way,” Bart Oosterveld, managing director and head of sovereign risk division at Moody’s in Washington, said in a telephone interview. “We’re indifferent over the set of outcomes.”

Debt Limit

The U.S. Treasury reiterated Oct. 31 that it expects to reach the federal debt limit “near the end of 2012.” The agency said in a statement that it can use “extraordinary measures” that would “provide sufficient ‘headroom’ under the debt limit to allow the government to continue to meet its obligations until early in 2013.”

Failure to reach even a temporary arrangement to prevent “the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode” would probably result in a downgrade, Fitch said.

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