November 29, 2011

Fitch Cuts U.S. Rating Outlook to Negative

Cites 'declining confidence' afte supercommittee failure

After the congressional supercommittee failed to find common ground for budget cuts, Fitch Ratings, the last agency to rate the U.S. outlook as stable, downgraded it on Monday to negative.

The U.S. still retains its triple-A credit rating from Fitch, although the agency cited “declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming” as its reason for the change in outlook. The change, according to the agency, makes the probability of a downgrade higher than 50% within the next two years.

Bloomberg reported that David Riley, Fitch’s head of sovereign ratings in London, called the supercommittee’s failure “a missed opportunity,” adding, “The scale of any subsequent budget cuts are probably going to have to be larger than they otherwise would have been and certainly implemented in a faster manner.”

The company also said that a congressional failure to agree on a “credible deficit reduction plan” combined with a “worsening” economic and fiscal outlook would probably end up with the U.S. losing its triple-A ranking. It added, “Further deficit reduction will not be credible if it relies solely on further cuts in discretionary spending rather than reform to entitlements and taxation.”

Colleen Murray, a Treasury Department spokeswoman in Washington, said in the report, “Fitch’s action is a reminder of the need for Congress to reduce the country’s long-term deficit in a balanced manner and to avoid efforts that would undo the $1.2 trillion in automatic cuts negotiated last summer.”

Riley said the reason Fitch retained the U.S.’s triple-A rating is due to the dollars role as a reserve currency. “That does provide a tremendous amount of financial flexibility for the U.S.,” he said, continuing, “We’re waiting for a plan to be presented. Our expectations are that we won’t get substantial fiscal reform this side of congressional and presidential elections.”

Standard & Poor’s already dropped the U.S.’s rating on Aug. 5 after Congress brought the country to the brink of default in a budget standoff. However, the ratings agency made a $2 trillion error in its evaluation, which caused both President Barack Obama and Berkshire Hathaway chief Warren Buffett to criticize S&P; the latter said the U.S. should have been upgraded to “quadruple-A.”

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