TEXT-Fitch:European investors bullish on US fiscal cliff resolution

Thu Nov 8, 2012 5:32am EST

Nov 08 - European fixed-income investors expect the looming US fiscal cliff to be avoided, according to Fitch Ratings' quarterly investor survey.

European investors are confident that US politicians will solve the problem of the budget impasse, the survey shows. A strong majority of 82% of survey respondents say the US fiscal cliff will ultimately be avoided, but that it is affecting confidence in the economy and policy making in the meantime. The most optimistic mood was flagged by 10% of investors who expect the cliff will be avoided and think it is of little concern. Only 5% fear it will trigger a damaging US recession with negative global repercussions. 2% believe it will be positive in correcting the budget deficit.

As we said Wednesday following President Barack Obama's re-election, Fitch believes the fiscal cliff (some USD600bn of tax increases and spending cuts that come into effect on 1 January 2013) and an increase in the debt ceiling are pressing issues that the president and Congress must address in the coming weeks if the US is to avoid a fiscal and economic crisis.

Fitch estimates that the fiscal cliff would tip the US economy into an unnecessary and avoidable recession and result in an increase in the unemployment rate to above 10% in 2013.

Avoiding the fiscal cliff and a securing a timely increase in the debt ceiling - the outcome expected by Fitch - would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilise federal debt over the medium term, consistent with the US retaining its 'AAA' status. Conversely, 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 mean that the general election had not resolved the political gridlock in Washington and would probably result in a sovereign rating downgrade by Fitch.

The Q412 survey was conducted between 2 October and 6 November and represents the views of managers of an estimated USD7.4 trillion of fixed-income assets. We will publish the full survey results in mid-November.

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