LONDON & NEW YORK--(BUSINESS WIRE)--Fitch Ratings today published a Special Report, 'U.S. Public Finances - An Update', detailing the medium-term fiscal projections that underpinned Fitch's revision of the United States 'AAA' sovereign Rating Outlook to Negative from Stable on Nov. 28, 2011.
The failure of the Congressional Joint Select Committee on Deficit Reduction (the so-called Super Committee) to agree on at least USD1.2 trillion of deficit reduction measures underlines the challenge of securing broad-based consensus on how to reduce the outsize budget deficit and contain the rise in federal debt.
By postponing the difficult decisions on tax and spending until after the forthcoming Congressional and Presidential elections, the scale and pace of required deficit reduction will consequently be greater. Even under optimistic economic and fiscal policy assumptions, Fitch believes that at least USD3.5 trillion of additional deficit reduction measures will be required to stabilise federal debt (held by the public) at around 90% of GDP in the latter half of the current decade.
Fitch's latest fiscal and economic projections imply that federal debt held by the public will exceed 90% of GDP by the end of the decade. Federal debt will rise in the absence of expenditure and tax reforms that would address the challenges of rising health and social security spending as the population ages. The high and rising federal and general government debt burden is not consistent with the U.S. retaining its 'AAA' status despite its other fundamental sovereign credit strengths.
The Rating Outlook on the U.S. 'AAA' sovereign rating was revised to Negative from Stable on Nov. 28, 2011 in light of revisions to Fitch's medium-term fiscal projections following the failure of the Super Committee to reach an agreement. This reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the 'AAA' sovereign rating will be forthcoming. In the absence of material shocks, Fitch does not expect to resolve the Rating Outlook until 2013.
A key task of an incoming Congress and Administration in 2013 is to formulate a credible plan to reduce the budget deficit and stabilise the federal debt burden. Without such a strategy, the sovereign rating will likely be lowered by the end of 2013. Agreement will also have to be reached on raising the federal debt ceiling, which is expected to become binding in the first half of 2013.
The low cost and security of fiscal funding are key credit strengths relative to 'AAA' peers', reflecting the global benchmark status of the U.S. dollar and treasury market. Fitch recognises that the U.S. federal government has a higher debt tolerance than its peers and thus can support a higher debt burden for a given rating level. However, as debt rises, the fiscal space to absorb future economic and financial shocks diminishes and the risks of a fiscal crisis correspondingly increase.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Public Finances - An Update
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=662832
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