Jan 28 - Fitch Ratings says the temporary suspension of the debt limit removes the near-term risk to the U.S. ‘AAA’ rating. Fitch had previously commented that failure to increase the debt ceiling in a timely manner would prompt a review of the U.S. sovereign rating. Without the distraction of a near-term funding crisis for the federal government, Congress and the Administration have the space to focus on the substantive fiscal policy choices necessary to place public finances on a sustainable path over the medium to long-term.
In line with Fitch’s previous commentary, agreement on a credible medium-term deficit reduction plan consistent with sustaining the economic recovery would likely result in the affirmation of the U.S. ‘AAA’ rating and revision of the rating Outlook to Stable from Negative. In the absence of such a plan, the Negative Outlook would likely be resolved with a downgrade later in 2013.
As the legacy and macro-financial imbalances associated with the financial and real estate boom and bust diminish, the underlying dynamism and potential of the U.S. economy is beginning to reassert itself. Fitch forecasts an acceleration of the recovery to 2.8% in 2014 which will support deficit reduction and stabilisation of federal debt relative to national income. Nonetheless, in the absence of additional structural measures to narrow the gap between federal outlays and receipts, federal government debt will continue to drift higher and public debt, including that owed by state and local governments will reach around 115% of GDP by the end of the decade. Such a level of indebtedness would erode the fiscal space necessary to absorb future negative economic or financial ‘shocks’ and limit the scope for counter-cyclical fiscal policies and hence would be inconsistent with the federal government and Treasury securities retaining their ‘AAA’ status.
The passage of a fiscal year 2014 budget resolution through Congress and a corresponding increase in the debt limit would strengthen confidence in the fiscal framework and provide a platform for putting in place a longer-term deficit reduction plan. Avoiding a government ‘shutdown’ requires Congress to pass a continuing resolution by March 27 and the deferred spending sequester comes into effect on March 1. Failure to reach timely agreement on these would not prompt an immediate review of the U.S. sovereign rating, though it would undermine confidence in the prospects for reaching agreement this year on a credible deficit reduction plan necessary to forestall a downgrade of the U.S. rating.