Fitch Keeps U.S. Rating at AAA

The positive news stands in contrast to dangers of downgrades in U.S. debt, which caused Standard & Poor’s to drop its rating two years ago, when the United States was struggling through the recovery from a recession, a rising deficit and a battle in Congress over the budget.

The firm said:

Fitch Ratings has affirmed the United States of America’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AAA’ with Stable Outlooks. The ratings on senior unsecured foreign and local currency bonds have also been affirmed at ‘AAA’

It gave as its key reasons:

The economy is large, rich and diverse, with GDP per capita (at purchasing power parity) and measures of human development above the ‘AAA’ median. The economy is one of the most productive, dynamic and technologically advanced in the world, underpinned by strong institutions, a favourable business climate and efficient product and labour markets. Capital markets are the deepest and most liquid in the world.

Growth prospects are more robust and demographic trends less worrisome than in many advanced country peers. The US economy has gained momentum and Fitch forecasts GDP growth to accelerate from 1.9% in 2013 to 2.8% in 2014 and 3.1% in 2015. The Federal Reserve has started normalising monetary policy. The banking system is well capitalised with a total risk-based capital ratio of 15%. Fannie Mae will shortly join Freddie Mac in paying the Treasury dividends in excess of its crisis bailout.

GGGD is the highest of any ‘AAA’ sovereign at an estimated 98.6% of GDP at end-2013 and over twice the ‘AAA’ median, albeit all US dollar-denominated. Without additional tax and spending measures, the debt ratio is projected to start to rise again towards the end of the decade owing to ageing-related health and social security spending, and higher interest costs. The level of the debt burden reduces the capacity of the US sovereign to absorb shocks.

A combination of political polarisation, a balance of power in the legislature and the federal debt limit law has adversely affected the coherence of economic policy making, with across the board discretionary spending cuts, the federal government shutdown in October 2013 and debt ceiling crises in August 2011 and October 2013. After the suspension of the debt limit ends in March 2015 there is a risk of renewed brinkmanship that could undermine confidence in the role of the US dollar by casting doubt on the full faith and credit of the United States. This “faith” is a key reason why the US’s ‘AAA’ rating can tolerate a higher level of public debt than other ‘AAA’ sovereigns.

External liabilities are high, reflecting persistent current account deficits and low national savings rates, making the economy more vulnerable to adverse external shocks.

While concern about the U.S. rating did not affect Treasury rates because of an ongoing, occasional flight to safety, it does reflect growing confidence that both the recovery and fiscal restraint in Washington are bearing fruit