Fitch downgrades US outlook

Fitch has become the third ratings agency to downgrade the outlook for the US, from stable to negative, following a congressional committee’s failure to finalise deficit cuts.

All three of the main ratings agencies are watching the US keenly.

Moody’s issued a warning over the US’ credit rating in July, threatening to strip the country of its current triple A rating.

Standard & Poor’s downgraded America’s credit rating in August this year from AAA to AA+ following months of political wrangling over deficit cuts and whether or not to raise the country’s allowable public debt levels.

Independent German ratings agency Feri had cut the US from top notch well before any of the main trio moved.

Fitch still assigns the US the top AAA grade, but has downgraded its outlook for the economy due to its “declining confidence that timely fiscal measures necessary to place US public finances on a sustainable path will be forthcoming”.

Its negative outlook means Fitch is 50% more likely to implement an actual downgrade over the next two years.

Both S&P and Moody’s said the congressional committee’s failure to agree a plan for the cuts did not merit a ratings downgrade, because the inaction automatically triggers $1.2trn in automatic spending cuts.

US federal debt held by the public will exceed 90% of GDP by the end of the decade, according to Fitch. Gross debt, including local and state governments, will climb to 110% of GDP over the same period.

The Congressional Joint Select Committee on Deficit Reduction, a cross-party working group seeking a way to tackle America’s debt mountain, said recently it had failed to agree on fiscal consolidation measures to put to a congressional vote.

Rebecca Patterson, chief markets strategist in JP Morgan Asset Management’s institutional operations, said last month a failure to reach a “grand bargain” solution should not be unexpected.

But she added: “The only good news is that the pain associated with automatic spending cuts [if no deal is ultimately reached] is serious enough to push both parties to come to a compromise deal.

Patterson added market practitioners should not expect major policy initiatives from either the Democrats or Republicans in the lead-up to next year’s elections.

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