* Fitch reiterates top rating for U.S. credit is in jeopardy
* Latest fiscal wrangling threatens weak outcome, risk to
* Fitch: Spain faces further downgrades, Ireland could rise
* U.S. downgrade priced in, medium-term U.S. Treasuries
By Marc Jones and William James and Daniel Bases
LONDON/NEW YORK, Jan 15 The United States faces
a "material risk" of losing its AAA status if there is a repeat
of the wrangling seen in 2011 over raising the country's
self-imposed debt ceiling, credit ratings firm Fitch said on
The United States scraped up against its $16.4 trillion debt
ceiling on Dec. 31 and is now employing special measures to meet
its financial obligations. The Treasury Department said those
steps could be exhausted by mid-February.
Despite December's deal by U.S. politicians to avoid the
"fiscal cliff" of spending cuts and tax hikes, Fitch's head of
sovereign ratings, David Riley, said pressure on the country's
rating was increasing.
"If we have a repeat of the August 2011 debt ceiling crisis
we will place the U.S. rating under review. There will be a
material risk of the U.S. rating coming down," Riley said at a
conference hosted by the firm.
U.S. President Barack Obama dug in his heels on Monday,
rejecting any negotiations with opposition Republican leaders
over raising the U.S. borrowing limit, saying the United States
needs to pay the bills it has incurred.
Republicans want Obama to cut some spending to rein in the
deficit before they agree to raise the debt limit again.
Ben Bernanke, the Federal Reserve chairman, urged lawmakers
to lift the ceiling and avoid a default, warning that while he
was cautiously optimistic on the economy, there is still the
risk it suffers from political gridlock over the deficit.
"At this stage and this year, I think it is looking very
unlikely that you can achieve even $2-$3 trillion (in deficit
reduction) given the way Obama has been talking recently," said
David Keeble, global head of interest rate strategy at Credit
Agricole CIB in New York.
The deficit reduction that has been bandied about among
policy makers and credit analysts is $4 trillion over 10 years.
Fitch currently assigns the United States its highest rating
of AAA, but with a negative outlook. Standard & Poor's has
already downgraded the world's biggest economy, lowering the
United States to AA-plus in August 2011 - a move which appears
to have done little to dull the attraction of U.S. bonds for
investors. In fact, following that downgrade, U.S. Treasuries
rallied as investors flocked to the safe haven asset.
Moody's Investors Service shifted the outlook on its Aaa
rating to negative in the same month and has kept it there ever
"If you solemnly believe that there is going to be a ratings
cut by Fitch in the next month or so, then the only place is to
be in U.S. Treasuries, up to the 7-10 year sector and that will
perform well as a risk-off trade," said Keeble, who added any
downgrade by Fitch or Moody's at this point won't dramatically
reshape the world order.
Riley said the United States did not need the same kind of
super-strength austerity some major developed economies are
currently implementing because it was grinding out more economic
growth than other high-debt nations.
But he warned a repeat of the 2011 squabble would undermine
confidence in Washington.
"It is a concern that these self-inflicted crises are seeing
us stagger every six months to a new deadline," Riley said.
"That uncertainty over economic and fiscal policy is
something that is not typically characteristic of triple-A, and
more substantively we think it is weighing on the prospects for
growth and the recovery."
EUROPEAN FORTUNES DIVERGE
Fitch said Spain will continue to face downgrade risks even
if it avoids having to ask for a bailout, while Ireland could
claw its way back into the single-A rating band if a deal is
struck to share the burden of its banking debts.
On BBB-rated Spain, Riley said the downgrade risks were its
ability to deliver on deficit reduction, the cost of bank
recapitalisation and its weak economy.
Tony Stringer, sovereign analyst with Fitch, said the risks
of Britain losing its AAA status are "clearly increasing,"
warning it could pull the trigger if the country's budget in
March shows debt levels continue to rise.
"I think we will be watching the budget very closely to see
whether forecasts for peak debt and the trajectory for debt
coming down are still consistent (with reducing debt). If those
forecasts worsen in our view, I would suspect that is going to
lead to a negative outcome," Stringer told Reuters Insider
Ireland, which was bailed out in 2010, could see a possible
increase in its BBB-plus rating to the single-A category if its
debts can be shared out among euro zone states through the
region's bailout mechanisms, Fitch said.
The European Central Bank has committed to make unlimited
purchases of government bonds, known as Outright Monetary
Transactions (OMT), to support any euro zone sovereign that
enters into an international bailout programme.
The promise of a backstop has helped slash the cost of
borrowing for indebted euro zone sovereigns such as Spain since
it was announced by the ECB in September.
A poll of 162 investors present at the conference showed
that 57 percent expected Spain to request a bailout in 2013.