After the Debt Ceiling Passage: Fitch Remains Concerned Over U.S. AAA Rating

You have now seen that the Senate followed the House in the vote to raise the debt ceiling.  The credit ratings agencies are still lingering out there over how to rate the creditworthiness of the nation.  While S&P and Moody’s are still outstanding as far as comments, Fitch has already commented on the “AAA” rating of the United States.

The statement noted as commensurate with a “AAA” rating, …”the risk of sovereign default remains extremely low. While the agreement is clearly a step in the right direction, the United States, as in much of Europe, must also confront tough choices on tax and spending against a weak economic back drop if the budget deficit and government debt is to be cut to safer levels over the medium term.”

Fitch goes on to note that there is the political will and capacity to ultimately do the right thing.  Unfortunately, this is referred to as the first step and NOT THE END of a process of putting in plan to cut the budget deficit to a rate that will secure the “AAA” status over the medium-term.

The time for the review decision over our “AAA” rating is by the end of August.  The things noted that need continued improvement are revisions to taxation and spending policies that will act to cut the deficit.

The most sad part of this is the truth that no one in Washington wants to deal with: The U.S. government debt, including federal and state and local, will reach 100% of GDP by the end of 2012 at the current rate.  Even worse, Fitch says that this will continue rise over the medium term.

While the current “AAA” was called consistent earlier and while the decision over “AAA” seems likely to remain at the rating agency’s decision by the end of August, that does not mean that the rating of “AAA” is safe forever.  Fitch concluded that this rising debt profile over 100% of GDP is a “profile that is not consistent with the United States retaining its ‘AAA’ sovereign rating.”

In short, it looks like the United States will keep at least Fitch’s ‘AAA’ rating… for now.  After 2011, that is not assured and the writing is on the wall.

JON C. OGG