Fitch Affirms United States at 'AAA'; Outlook Stable

Fri Mar 21, 2014 1:03am EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: United States of America - Rating Action Report here LONDON, March 21 (Fitch) Fitch Ratings has affirmed the United States of America's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The ratings on senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. This rating action resolves the Rating Watch Negative (RWN) on which the ratings were placed on 15 October 2013, in line with Fitch's previous guidance that this would take place by end-March. KEY RATING DRIVERS The affirmation at 'AAA' with a Stable Outlook and resolution of the RWN reflects the following key rating drivers and their relative weights: High The federal debt limit was suspended in mid-February in a timely manner and in a way that avoided casting uncertainty over the full faith and credit of the US, in contrast to the crises in August 2011 and October 2013. The suspension is in place until 15 March 2015, beyond which the seasonality of tax payments and use of extraordinary measures might allow the Treasury to fund the government until around July 2015. Fitch forecasts gross general government debt (GGGD), excluding trade payables comparable with EU countries, to peak at 100% of GDP in 2014 before declining slightly for four years. This is below the threshold of 110% that we previously identified as incompatible with a 'AAA' rating for the US. Fitch also forecasts federal government debt at 72.5% of GDP for 2014. The US has greater debt tolerance than 'AAA' peers owing to the unparalleled financing flexibility provided by being the issuer of the world's pre-eminent reserve currency and benchmark fixed income asset. Medium The debt ceiling crises in August 2011 and October 2013 do not appear to have negatively affected US bond yields or reduced foreign holdings of Treasury securities. Therefore Fitch does not believe the role of the US dollar, sovereign financing flexibility or debt tolerance has been materially damaged. Strong fiscal consolidation has been achieved. The federal budget deficit fell to 4% of GDP in FY13, from 6.7% in FY12 and 9.8% in FY09, reflecting both policy measures and economic recovery. We forecast a further decline in the deficit to 2.9% in FY14 and 2.6% in FY15. There has been some improvement in the coherence of economic policymaking, with the December 2013 Bipartisan Budget Act, which agreed a budget for FY14 and FY15; the January Consolidated Appropriations Act 2014, which funded the government for FY14; and as mentioned previously the timely suspension of the federal debt ceiling. Nevertheless, we do not expect a 'grand bargain' on deficit and debt reduction this side of the 2016 presidential elections. Although the ratio of GGGD/GDP is projected to rise again later in the decade, this would be at a more moderate pace and to a lower level than when Fitch assigned a Negative Outlook in November 2011. The rating action also takes account of the uncertainty of long-term economic and fiscal projections, and the potential for future fiscal measures in a more conducive political environment. The US's AAA IDRs also reflect the following key rating drivers: The economy is large, rich and diverse, with GDP per capita (at purchasing power parity) and measures of human development above the 'AAA' median. The economy is one of the most productive, dynamic and technologically advanced in the world, underpinned by strong institutions, a favourable business climate and efficient product and labour markets. Capital markets are the deepest and most liquid in the world. Growth prospects are more robust and demographic trends less worrisome than in many advanced country peers. The US economy has gained momentum and Fitch forecasts GDP growth to accelerate from 1.9% in 2013 to 2.8% in 2014 and 3.1% in 2015. The Federal Reserve has started normalising monetary policy. The banking system is well capitalised with a total risk-based capital ratio of 15%. Fannie Mae will shortly join Freddie Mac in paying the Treasury dividends in excess of its crisis bailout. GGGD is the highest of any 'AAA' sovereign at an estimated 98.6% of GDP at end-2013 and over twice the 'AAA' median, albeit all US dollar-denominated. Without additional tax and spending measures, the debt ratio is projected to start to rise again towards the end of the decade owing to ageing-related health and social security spending, and higher interest costs. The level of the debt burden reduces the capacity of the US sovereign to absorb shocks. A combination of political polarisation, a balance of power in the legislature and the federal debt limit law has adversely affected the coherence of economic policy making, with across the board discretionary spending cuts, the federal government shutdown in October 2013 and debt ceiling crises in August 2011 and October 2013. After the suspension of the debt limit ends in March 2015 there is a risk of renewed brinkmanship that could undermine confidence in the role of the US dollar by casting doubt on the full faith and credit of the United States. This "faith" is a key reason why the US's 'AAA' rating can tolerate a higher level of public debt than other 'AAA' sovereigns. External liabilities are high, reflecting persistent current account deficits and low national savings rates, making the economy more vulnerable to adverse external shocks. RATING SENSITIVITIES The current rating Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating downgrade. However, future developments that may, individually or collectively, lead to negative rating action include: - A significant increase in general government deficits and debt/GDP ratio, for example if the US authorities do not take measures in the medium term to offset rising expenditure pressures from ageing and higher interest rates later in the decade. - A material deterioration in the coherence and credibility of economic policymaking or a negative shock that erodes the role of the US dollar as the pre-eminent global reserve currency and reduces financing flexibility and debt tolerance. KEY ASSUMPTIONS Fitch assumes that the federal debt limit, which has been suspended until 15 March 2015, will be suspended again or raised in due course before the Treasury exhausts its extraordinary measures and capacity to fund the government. Fitch's medium-term fiscal projections draw heavily upon Congressional Budget Office projections, which incorporate an assumption that current laws governing federal taxes and spending generally remain the same. Fitch's projections also assume that the medium-term growth potential of the US economy is 2.2%; and that state and local government budget deficits remain the same as a percentage of GDP. Its projections are sensitive to these and other economic and fiscal assumptions. Financial sector risks are currently judged to be low, as reflected in Fitch's stable outlook for the US banking sector and Bank Systemic Indicator of 'a' . Contact: Primary Analyst Ed Parker Managing Director +44 20 3530 1176 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst James McCormack Managing Director +44 20 3530 1286 Committee Chairperson Douglas Renwick Senior Director +44 20 3530 1045 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Related Research: United States Full Rating Report, March 2014 (forthcoming) U.S. Government Debt and Rating Outlook, March 2014 (forthcoming) 'AAA' Sovereign Characteristics and Public Debt Ratios, 22 October 2013 Fitch Places United States' 'AAA' on Rating Watch Negative, 15 October 2013 here U.S. Debt Limit Deadline Back in Focus, 5 February 2014 here U.S. Medium-Term Fiscal Projections - An Update, 28 June 2013 Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here ‘AAA’ Sovereign Characteristics and Public Debt Ratios here U.S. Medium-Term Fiscal Projections – An Update here Additional Disclosure Solicitation Status here ALL 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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