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Will the Fitch Downgrade Threat Precipitate a Fiscal Cliff Deal?

Daily Ticker

Fitch Ratings warned U.S. lawmakers on Wednesday that it was prepared to downgrade the nation’s "AAA" rating if a fiscal cliff deal was not completed before Dec. 31.

“Failure to avoid the fiscal cliff…would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the U.S. into an avoidable and unnecessary recession," Fitch said in its 2013 global outlook.

Standard & Poor’s stripped the U.S. of its triple-A status in August of 2011. Fitch currently has a negative outlook on its U.S. sovereign rating.

President Barack Obama and House Speaker John Boehner have each dropped some of their key demands as the fiscal cliff negotiations come down to the wire.

Related: Not the End of the World if Fiscal Cliff Deal Happens Next Year: Heidi Moore

The President says he would now accept $1.2 trillion in new revenue, down from his initial $1.6 trillion proposal, as well as increase the income bracket for the Bush-era tax cut extensions to $400,000 from $250,000 for joint filers. Obama said he would also seek $930 billion in government spending cuts. Boehner said he supports raising tax rates for millionaires and would allow the debt ceiling to rise for another year without a Congressional fight.

Related: Get Rid of the Debt Ceiling: Alice Rivlin

But Boehner insists that any compromise include broad spending cuts to mainstay government programs like Medicare and Social Security. Boehner’s proposal, dubbed “Plan B” could be put to a vote in the House on Thursday. Washington insiders say the speaker’s latest offer has little chance of passing in the Democratic-controlled Senate. If a deficit-reduction deal cannot be agreed to before the end of the year, $600 billion in tax increases and spending cuts to both domestic and military programs will take effect next month.

As Eduardo Porter writes in his latest New York Times column, the plans promulgated by both parties reduce critical parts of government to levels not seen in more than 50 years. According to Porter, the House budget resolution takes a more drastic approach to cutting and would “cut the government’s civilian discretionary budget to the smallest it has been as a share of the economy at least since the Eisenhower administration -- when a quarter of the population lived under the poverty line, thousands of children still contracted polio each year and fewer than one in 12 Americans older than 25 had a college degree. According to estimates by the Congressional Budget Office, even going over the so-called fiscal cliff would not cut it as deeply.”

Earlier this year economists and technocrats decried the austerity measures demanded of debt-ridden countries like Greece and Spain. The massive spending reductions would have a negative impact on these countries’ future growth and bury them deeper in debt, critics said.

Related: Why Austerity May Be Over in Europe

As the Daily Ticker’s Aaron Task and Henry Blodget discuss in the accompanying clip, the proposed solutions by lawmakers in Washington resemble the same type of policies -- albeit at a smaller scale -- as the ones pursued by their European counterparts. U.S. debt totals $16 trillion and the federal government's deficit exceeds $1 trillion this year, a situation that calls for revenue savings. But economic growth remains relatively flat and GDP is likely to average less than 2% in 2012.

Democrats and Republicans may have moved an inch or two closer in the fiscal cliff talks, but both parties could still “botch” a deal says Blodget. The billions in spending cuts and tax hikes at the center of the fiscal cliff would have a serious impact on the still fragile U.S. economy only if lawmakers refuse to come together on a solution.

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