Rating reflects still strong economic and credit fundamentals. U.S. sovereign liabilities, both the dollar and Treasury securities, remain the global benchmark and accordingly the U.S. credit profile benefits from unparalleled financing flexibility and enhanced debt tolerance, even relative to other large ‘AAA’-rated sovereigns. The U.S. dollar’s status as the pre-eminent global reserve currency and depth of the U.S. Treasury market render financing risks minimal and underpin a low cost of fiscal funding.
Fitch’s latest projections see the federal debt burden topping 90% of GDP and interest accounting for more than 20% of tax revenues by 2020. Throw in local and state debts and gross government debt climbs to 110% of GDP. That level “would no longer be consistent with the U.S. retaining its ‘AAA’ status despite its underlying strengths.”
The ratings agency said it has declining confidence that Congress will put the U.S. on a more sustainable fiscal path, after the Supercommittee failed to find at least $1.2 trillion to cut out of the federal budget over the next decade by last week’s deadline. Last week, Moody’s said its rating was unaffected by the Supercommittee coming up empty, and added Monday that the lack of a deal does not affect its fiscal outlook on the U.S.
Fitch warns that the $1 trillion of automatic across-the-board cuts triggered by the failure of the Supercommittee is primarily focused in discretionary spending, no recipe for long-term fiscal responsibility. “Further deficit reduction will not be credible if it relies solely on further cuts in discretionary spending rather than reform to entitlements and taxation,” Fitch says.
The firm’s negative outlook means there is a better than 50% chance of downgrade over the next two years, but Fitch said it does not expect to resolve the outlook until late 2013 absent any “material adverse shocks,” so that it can take into account “any deficit-reduction strategy that emerges after the Congressional and Presidential elections.”
If yields on U.S. Treasury securities are any indication, the uncertainty around global economic growth and the European sovereign debt crisis are far more pressing concerns to investors than America’s growing deficit. Even after S&P’s downgrade in August, yields have declined as the market continued to treat U.S. debt as one of the few safe havens in times of stress. The 10-year yield currently sits just below 2%, and has shown few signs of moving very far above that level at a time when Europe’s debt picture continues to look far worse than the one on this side of the Atlantic.