Fitch Places United States' 'AAA' on Rating Watch Negative


NEW YORK/LONDON, October 15 (Fitch) Fitch Ratings has placed theUnited States of America's (U.S.) 'AAA' Long-term foreign and local currencyIssuer Default Ratings (IDRs) on Rating Watch Negative (RWN). The ratings ofall outstanding U.S. sovereign debt securities have also been placed on RWN, ashas the U.S. Short-term foreign currency rating of 'F1+'. The Outlook on theLong-term ratings was previously Negative. The U.S. Country Ceiling hasbeen affirmed at 'AAA'. Fitch expects to resolve the RWN by the end of Q114 at thelatest, although timing would necessarily reflect developments and events,including the duration of any agreement to raise the debt ceiling. KEY RATING DRIVERS In line with Fitch's previous statements, the RWN reflects thefollowing key rating drivers and their relative weights:High- The U.S. authorities have not raised the federal debt ceilingin a timely manner before the Treasury exhausts extraordinary measures. TheU.S. Treasury Secretary has said that extraordinary measures will be exhaustedby 17 October, leaving cash reserves of just USD30bn. Although Fitch continuesto believe that the debt ceiling will be raised soon, the political brinkmanshipand reduced financing flexibility could increase the risk of a U.S. default.- Although the Treasury would still have limited capacity tomake payments after 17 October it would be exposed to volatile revenue andexpenditure flows. The Treasury may be unable to prioritise debt service, and it isunclear whether it even has the legal authority to do so. The U.S. risks beingforced to incur widespread delays of payments to suppliers and employees, aswell as social security payments to citizens - all of which would damage theperception of U.S. sovereign creditworthiness and the economy.- The prolonged negotiations over raising the debt ceiling(following the episode in August 2011) risks undermining confidence in the roleof the U.S. dollar as the preeminent global reserve currency, by castingdoubt over the full faith and credit of the U.S. This "faith" is a key reason whythe U.S. 'AAA' rating can tolerate a substantially higher level of public debtthan other 'AAA' sovereigns. Medium- The repeated brinkmanship over raising the debt ceiling alsodents confidence in the effectiveness of the U.S. government and politicalinstitutions, and in the coherence and credibility of economic policy. It will alsohave some detrimental effect on the U.S. economy.The 'AAA' rating reflects the U.S.'s strong economic and creditfundamentals, including:- Its highly productive, diversified and wealthy economy;extraordinary monetary and exchange rate flexibility; and the exceptional financingflexibility afforded by the global reserve currency status of the U.S.dollar and the depth and liquidity of domestic capital markets - in particular theU.S. Treasury market. The U.S. sovereign credit profile also benefits from therespect for property rights, the rule of law and a high degree of socialstability.- Fitch continues to judge that the U.S. economy (and hence taxbase) remains more dynamic and resilient to shocks than its high-grade ratingpeers. Fiscal and macroeconomic risks emanating from the financial sector aregenerally low and diminishing and becoming supportive of, rather than a dragon, economic growth. Fitch forecasts economic growth to pick up from 1.6% in2013 to 2.6% in in 2014 and to average 3% over 2015-17, before reverting to itsassumed long-run trend growth rate of 2.25%. The projected recovery is supportedby easing headwinds from private sector debt deleveraging, a pick-up inthe housing market and a gradual decline in unemployment.- The 'AAA' rating also reflects the halving of the federalbudget deficit since 2010, which is now approaching a level consistent with debtstabilisation. The Budget Control Act passed in August 2011 implied significantfiscal consolidation and Congress and the Administration have adheredto the automatic spending cuts - the sequester - specified under the Act in theabsence of agreement on an alternative and equivalent set ofdeficit-reduction measures. In addition, the passage of the American Taxpayer Relief Act on 1January 2013, which implied a tax increase of more than USD600bn, has alsocontributed to the deficit reduction effort.- Fitch's medium-term fiscal projections imply federal andgeneral government (which includes states and local governments) gross debtstabilising next year and over the remainder of the decade at around 72% and 104% ofGDP, respectively. This is below the 80% and 110% thresholds thatFitch previously identified as being inconsistent with the U.S. retaining its'AAA' status.- Nevertheless, public debt stabilisation at such elevatedlevels still render the US economy and public finances vulnerable to adverse shocksand in the absence of additional spending reform and revenue measures,deficits and debt will begin to rise again at the end of the decade. The U.S. isthe most heavily indebted 'AAA' rated sovereign, with a gross debt ratioequivalent to double that of the 'AAA' median.RATING SENSITIVITIES The RWN reflects the following risk factors that mayindividually or collectively result in a downgrade of the ratings: - Failure by the government to honour interest and/or principalpayments on the due date of U.S. Treasury securities would lead Fitch todowngrade the U.S. sovereign IDR to 'Restricted Default' (RD) until the defaultevent was cured. We would also downgrade the rating of the affected issue(s) to 'B+'from 'AAA', the highest rating for securities in default in expectation of fullor near-full recovery. Debt securities approaching maturity or those withapproaching coupon payments would be vulnerable to a downgrade. The Country Ceilingwould likely remain 'AAA'.In the event of a deal to raise the debt ceiling and to resolvethe government shutdown, which Fitch expects, the outcome of a subsequentreview of the ratings would take into account the manner and duration of the agreementand the perceived risk of a similar episode occurring in the future. Itwould also reflect Fitch's assessment of the following main factors:- The impact of the debt ceiling brinkmanship and governmentshutdown on our assessment of the effectiveness of government and politicalinstitutions, the coherence and credibility of economic policy, the potentiallong-term impact on the U.S. sovereign's cost of funding and cost of capital for theeconomy as a whole, and the implications for long-term growth.- Our assessment of the prospects for further deficit-reductionmeasures in future years necessary to contain government deficits in theface of long-term spending pressures and place public debt on a downward path overthe medium to long term.KEY ASSUMPTIONSFitch continues to believe that an agreement will be reached toend the current political impasse and raise the U.S. debt ceiling. Even if thedebt limit is not raised before or shortly after 17 October, we assume there issufficient political will and capacity to ensure that Treasury securitieswill continue to be honoured in full and on time.Fitch's federal debt projections reflect its economic and fiscalpolicy assumptions and were detailed in the Special Report, 'U.S.Medium-Term Fiscal Projections - An Update' (dated 28 June 2013; see link below).Subsequent to that analysis, the Bureau of Economic Analysis revised the levelof GDP up by around 3.4% due to revisions in the way GDP is calculated,including reclassifying spending on R&D and intellectual property asinvestment. This has had the statistical effect of lowering debt/GDP ratios, but hasnot significantly affected the trajectory of debt dynamics or itssensitivity to shocks. Since the June review, Fitch has revised down itsforecasts for GDP growth for 2013 to 1.6% from 1.9% and for 2014 to 2.6% from2.8%. Fitch's medium-term fiscal projections incorporate assumptionsregarding the medium-term growth potential of the US economy and do notincorporate potential upside benefits from shale gas or downside risks emanating fromthe eurozone and elsewhere. They draw heavily upon Congressional Budget Office(CBO) projections, including CBO assumptions and judgements regarding the take upof various benefits as well as the rate of growth of health care spending.Financial sector risks are currently judged to be low asreflected by Fitch's stable outlook for the U.S. banking sector. Contact: Primary AnalystEd ParkerManaging Director+44 20 3530 1176Fitch Ratings Limited30 North ColonnadeLondon E14 5GNSecondary AnalystTony StringerManaging Director+44 20 3530 1219Committee ChairpersonDouglas RenwickSenior Director+44 20 3530 1045Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,Email:; Peter Fitzpatrick, London, Tel:+44 20 3530 1103, Email:; Daniel Noonan,New York, Tel: +1 (212) 908-0706, Email: information is available on www.fitchratings.comApplicable criteria, 'Sovereign Rating Criteria' dated 13 August2012 and 'Country Ceilings' dated 09 August 2013, are available Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS ANDDISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THISLINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLEON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS,CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'SCODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATEFIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLEFROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHERPERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN ANEU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUERON THE FITCH WEBSITE.

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