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Fitch Affirms U.S. Triple-A Rating Status

Source: WSJ - Matt Phillips & Mia Lamar

Posted on 17 Aug 2011

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Fitch Ratings on Tuesday affirmed the triple-A status of the U.S., suggesting that the wealth and financial flexibility of the U.S. continue to make it one of the world's most-reliable borrowers. By so doing it also left Standard & Poor's as the sole major credit-rating firm to downgrade the U.S. rating.

Fitch, which also called the recent Budget Control Act to reduce the deficit a "significant positive development, said its confidence in the U.S. is supported by the a pivotal role the U.S. plays in the global financial system, the U.S. dollar's role as the reserve currency and its diversified economy.

"We still believe that the U.S. is an exceptionally strong credit," said David Riley, head of government ratings at Fitch Ratings, a unit of French company Fimalac SA. "Relative to some of its other major triple-A peers, at this point in time, we don't think the U.S. is materially weaker than some of those."

The recent flurry of interest in the U.S. credit rating is part of a broader global market dynamic, in which investors are increasingly skeptical about the state of government finances. European nations remain embroiled in a debt crisis that began with investor doubts on peripheral nations such as Ireland, Portugal and Greece. Those worries have since spread to core European nations such as Italy and Spain.

To a large extent, anxiety over government debt grew out of the financial crisis of 2008, which forced governments worldwide to boost outlays and debt levels to shore up the financial system and the economy. At the same time, the deep economic downturn brought on by the crisis depressed tax receipts and government revenues, worsening the fiscal position of countries that were already on less-than-firm footing.

For example, Fitch wrote in its report that U.S. federal revenue averaged roughly 18.5% of gross domestic product over the long term before the financial crisis and subsequent recession, but that the number has since declined to just below 15%. At the same time, spending by the federal government has risen sharply in recent years to around 23% of GDP, versus a long-run average of 18%.

Fitch's affirmation of the U.S.'s triple-A rating further isolates S&P as the only major ratings firm to downgrade the U.S. when it lowered the rating to double-A-plus on Aug. 5. Moody's Investors Service affirmed its triple-A rating on the U.S. on Aug. 2, but assigned a negative outlook.

At the time of its downgrade, S&P said its opinion reflected a view that "the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.

The S&P downgrade of the U.S. helped stoke a tumultuous week for global markets, marked by wild swings in the U.S. stock market. But amid that volatility investors continued to buy U.S. Treasury debt as a safe haven, pushing prices higher, and yields—which move in the opposite direction—down to levels last seen in January 2009. That move lower in yields suggests investors continue to believe that the U.S. is a safe place to lend money.

"The Treasury Department continues to believe that Treasury securities are AAA investments. Today's report underscores the importance of Congress taking additional actions to address our long-term fiscal challenges," a department spokesman said Tuesday of the Fitch affirmation.

Looking ahead, Fitch said it will take a new look at its credit rating following the outcome of deliberations of the Joint Select Committee on Deficit Reduction. That 12-lawmaker panel is charged with reducing the budget deficit by at least $1.2 trillion this fall under the Budget Control Act, the last-minute deficit-reduction package signed by President Obama on Aug. 2.
Mr. Riley suggested that, while the negotiation process to reach that deal was tumultuous, ultimately the agreement was an important step for the U.S.

"We do think the Budget Control Act was a positive development and we do think it's important to wait and see how the Joint Select committee deliberations go," Mr. Riley said.

If the "supercommittee" fails to to recommend a deficit-reduction plan or Congress fails to adopt it, $1.2 trillion in automatic cuts would kick in. Fitch would view the failure to strike a deal as a negative, even with the automatic cuts.

"We think these [cuts] would be somewhat less credible and it would raise some issues about whether our judgment that there is the ability to reach consensus to bring down the deficit in a timely fashion, exists," Mr. Riley said, adding that it is always possible that these automatic cuts could be overridden government officials.

Fitch says if the supercommittee failed to reach an agreement, it would likely result in negative rating action, most likely the revision of the Fitch's outlook to "negative."

Moody's struck similar notes in its Aug. 2 affirmation of the U.S. triple-A rating. Moody's analysts wrote that "should the new mechanism put in place by the Budget Control Act prove ineffective, this could affect the rating negatively."

As for the process of reaching the deal, Fitch underscored in its report that it believes the U.S. debt ceiling, which is separate from the budgetary process, "is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline."

"It doesn't actually impose a discipline on the budgetary process and it's the budgetary process that produces the debt, not the ceiling," Mr. Riley said.

He added that the last-minute agreements that seem to stem from the debt ceiling "harm the U.S. in terms of its perception with investors and particularly international investors."

There are other key variables that could prompt Fitch to reconsider its views on the U.S. For instance, Fitch's base case for the economy is that growth manages to reaccelerate into the second half of 2011. If growth is slower than projected, that would imply lower tax receipts and a potentially worse fiscal picture.