Fitch Cuts Outlook on US Credit Rating to Negative
This afternoon Fitch Ratings lowered the outlook on the United States' credit rating from stable to negative. Fitch, considered one of the "big three" credit rating agencies along with Moody's Investors Service and Standard & Poor's (S&P), announced their decision one week after the Joint Select Committee on Deficit Reduction (Super Committee) failed to reach an agreement on at least $1.2 trillion in deficit reduction and almost four months after S&P lowered the U.S. credit rating from AAA to AA+. (Read CRFB's paper Understanding the S&P Downgrade)
In a press release (subscription required), Fitch affirmed the United States' AAA credit rating, but cited economic uncertainty, the high debt-to-GDP ratio and--of course--the failure of the Super Committee as reasons behind their decision to lower our outlook:
Fitch's revised fiscal projections envisage federal debt held by the public exceeding 90% of national income (GDP) and debt interest consuming more than 20% of tax revenues by the end of the decade, and including the debt of state and local governments - gross general government debt will reach 110% of GDP over the same period. In Fitch's opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its 'AAA' status despite its underlying strengths. Such high levels of indebtedness would limit the scope for counter-cyclical fiscal policies and the U.S. government's ability to respond to future economic and financial crises.
The Negative Outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. 'AAA' sovereign rating will be forthcoming following failure of the Congressional Joint Select Committee on Deficit Reduction (JSCDR) to agree at least USD1.2 trillion of measures to cut the federal budget deficit over the next 10 years as mandated under the Budget Control Act passed in August (BCA 2011).
This should serve as yet another reminder to Washington that we MUST get our fiscal house in order--soon. A CRFB blog earlier this month focused on the potential impact of Super Committee failure on the U.S. credit rating--in fact, we noted that of the big three agencies, Fitch was the most optimistic about the U.S. credit rating. If it only took a week after the Super Committee deadline for Fitch to lower our outlook, imagine what the reaction would be if Congress voted to turn off or weaken the sequester (which some lawmakers are pushing for).
Like we've said countless times, the only way to truly fix our fiscal problems and reassure markets is a multi-year, comprehensive deficit-reduction plan that stabilizes and reduces debt as a percentage of GDP over the decade. Reforms to entitlement programs and the tax code must be part of the solution as well, and the sooner we put a plan in place the better. Judging from their press release, it looks like Fitch agrees with us:
Agreement and implementation in 2013 of a credible medium-term deficit reduction plan that would stabilise government indebtedness in the latter half of the decade would relieve downward pressure on the U.S. sovereign ratings, though by postponing the difficult decisions on tax and spending until after forthcoming Congressional and Presidential elections, the scale and pace of required deficit reduction will consequently be greater. Conversely, failure to reach agreement in 2013 on a credible deficit reduction plan and a worsening of the economic and fiscal outlook would likely result in a downgrade of the U.S. sovereign rating...Further deficit reduction will not be credible if it relies solely on further cuts in discretionary spending rather than reform to entitlements and taxation.