Fitch Affirms United States at 'AAA'; Outlook Remains Negative

Fri Jun 28, 2013 4:31pm EDT

Link to Fitch Ratings' Report: U.S. Medium-Term Fiscal Projections – An UpdateNEW YORK/LONDON, June 28 (Fitch) Fitch Ratings has affirmed the United States (U.S.) Long-term foreign and local currency Issuer Default Ratings (IDRs) and Fitch-rated Treasury security ratings at 'AAA'. Fitch has also affirmed the U.S. Country Ceiling at 'AAA' and Short-term foreign currency rating at 'F1+'. The Outlook on the Long-term IDRs remains Negative. KEY RATING DRIVERS The affirmation reflects the U.S.'s strong economic and credit fundamentals, including the global reserve currency status of the U.S. dollar, and progress on reducing government budget deficits. The Outlook remains Negative due to continuing uncertainty over the prospect for additional deficit-reduction measures necessary to reduce government indebtedness over the medium to long term, and near-term risks associated with the expiration of federal appropriations authority at the end of the current fiscal year (30 September 2013) and in particular a timely increase in the debt limit. Fitch will conduct a further review of the U.S. sovereign ratings by the end of 2013, which is expected to resolve the Negative Outlook. This review will reflect our assessment of the prospects for further deficit-reduction measures in future years necessary to contain government deficits in the face of long-term spending pressures and place public debt on a downward path. The affirmation of the U.S. 'AAA' sovereign ratings with a Negative Outlook reflects the following key factors. - The U.S. 'AAA' rating is underpinned by its highly productive, diversified and wealthy economy; extraordinary monetary and exchange rate flexibility; and the exceptional financing flexibility afforded by the global reserve currency status of the U.S. dollar and the depth and liquidity of domestic capital markets - in particular the U.S. Treasury market. The U.S. sovereign credit profile also benefits from the respect for property rights, the rule of law and high degree of political and social stability. - Fitch's current assessment is that the economic recovery is gaining traction as the headwinds from private sector debt deleveraging ease. This is underpinned by a pick-up in the housing market and gradual decline in unemployment. Fitch continues to judge that the U.S. economy (and hence tax base) remains more dynamic and resilient to shocks than its high-grade rating peers. - Fiscal and macroeconomic risks emanating from the financial sector are generally low and diminishing and becoming supportive of, rather than a drag on, economic growth. Fitch forecasts economic growth to accelerate from 1.9% this year to 2.8% in 2014 and to average 3% over 2015-17 before reverting to its assumed long-run trend rate of growth 2.25%. - The affirmation of the 'AAA' rating also reflects the halving of the federal budget deficit since 2010, which is now approaching a level consistent with debt stabilisation. In line with Fitch's previous analysis, the Budget Control Act passed in August 2011 implied significant fiscal consolidation and Congress and the Administration have adhered to the automatic spending cuts - the sequester - specified under the Act even the in absence of agreement on an alternative and equivalent set of deficit-reduction measures. In addition, the passage of the American Taxpayer Relief Act on 1 January 2013, which implied a tax increase of more than USD600bn, has also contributed to the deficit-reduction effort. - Fitch's latest medium-term fiscal projections (found in the accompanying report) imply federal and general government (that includes states and local governments) gross debt stabilising next year and over the remainder of the decade at around 74% and 107% of GDP, respectively. This is below the 80% and 110% threshold that Fitch previously identified as being inconsistent with the U.S. retaining its 'AAA' status. - The Negative Outlook reflects that public debt stabilisation at such elevated levels still render the US economy and public finances vulnerable to adverse shocks and in the absence of additional spending reform and revenue measures, deficits and debt will begin to rise again at the end of the decade. The U.S. is the most heavily indebted 'AAA' rated sovereign, with a general government gross debt equivalent to more than 100% of GDP, double the 'AAA' median. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings. - Failure to raise the federal debt ceiling in a timely manner (ie. several days prior to when the Treasury will have exhausted extraordinary measures and cash reserves) will prompt a formal review of the U.S. sovereign ratings and likely lead to a downgrade. In the unlikely event that the debt limit is not raised before the financing capacity of the Treasury is exhausted, it would be forced to dramatically cut back on current spending with adverse implications for the economic recovery. Even if it were to prioritise debt service - something the Treasury has repeatedly stated it has neither the legal authority nor logistical capability to do - it would likely incur arrears on a range of payment obligations and thus continue to incur debt, but in a disorderly and disruptive manner. Moreover, in such a scenario, investor confidence in the full faith and credit of the U.S., a key underpinning of the U.S. dollar's global reserve currency status (and why Fitch judges that the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns), would be undermined. - Non-essential operations of the federal government will cease from 30 September - a so-called 'government shutdown' - if Congress does not grant additional spending authority. The federal government would continue to honour its financial and other obligations, including debt service. A government shutdown would not in itself prompt a negative rating action from Fitch but would further undermine confidence in the budgetary process and the prospect of timely and additional deficit reduction measures over the medium term. - Political and/or economic developments that suggest that tax and spending reforms necessary to secure public finances over the long term are unlikely to be forthcoming. - Shocks that prompted a re-assessment of the medium-term economic and interest rate outlook with adverse consequences for debt dynamics would likely be negative for the rating. Factors that could trigger a revision of the Outlook to Stable and affirmation of the U.S. 'AAA' ratings are as follows. - Avoidance of a 'debt ceiling crisis' and government shutdown would suggest that despite profound political differences, there is a common willingness to avoid disruptive and regular episodes of 'crises' and would be supportive of a stabilisation of the Outlook. - Progress on tax and broader fiscal reforms as well as agreement on FY14 budget would send a strong positive signal that timely deficit-reduction measures that would prevent a rise in deficits and debt over the medium to long term and ultimately allow public debt to be placed on a downward path will likely be forthcoming. Such an outcome would support a revision of the Outlook to Stable and affirmation of the U.S. 'AAA' sovereign ratings. - Political and economic developments that enhance confidence in the long-run sustainability of public finances. KEY ASSUMPTIONS Fitch assumes that 'exit' from the Federal Reserve's extraordinary monetary accommodation and normalisation of interest rates will be gradual and orderly and not result in significant macro-financial instability. Financial sector risks are currently judged to be low as reflected in Fitch's stable outlook on the U.S. banking sector. Fitch's updated medium-term fiscal projections incorporate assumptions regarding the medium-term growth potential of the US economy and do not incorporate potential upside benefits from shale gas nor downside risks emanating from the eurozone and elsewhere. Fitch federal debt projections reflect its economic and fiscal policy assumptions and are detailed in the accompanying Special Report, 'U.S. Medium-Term Fiscal Projections - An Update' (available by clicking the link above). However, they do draw heavily upon Congressional Budget Office (CBO) projections, including CBO assumptions and judgements regarding the take up of various benefits as well as the rate of growth of health care spending. Fitch assumes that even in the unlikely event that the debt limit is not raised in a timely fashion, there is sufficient political will and capacity to ensure that Treasury securities will continue to be honoured in full and on time. Contact: Primary Analyst David Riley Managing Director +44 20 3530 1175 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Lucila Broide Director +1 212 908 0898 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com; Daniel Noonan, New York, Tel: +1 (212) 908-0706, Email: daniel.noonan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Sovereign Rating Methodology' dated 13 August 2012 are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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