US downgrade in 2013, warns Fitch

Fitch Ratings has given the US a negative outlook after the failure of the Congressional Joint Select Committee.

Although the outlook has been revised down from stable to negative, the US has held on to its AAA rating based on strong economic and credit fundamentals.

“Fitch’s current assessment is that the U.S. economic recovery will regain momentum in the latter half of next year and into 2013, and that a period of above-trend growth will be subsequently followed by growth of at least 2 and 1/4% over the long term,” said Fitch in a statement today.

A negative outlook is a warning that the US stands a 50% chance of a downgrade over the next two years, says Fitch.

In a statement today, Fitch described a loss of confidence in the US’ ability to implement “fiscal measures necessary to place US public finances on a sustainable path” after the committee failed to agree on $1.2 trillion (£774 billion) in cuts last week.

A failure to agree on a credible deficit reduction plan by 2013 “would likely result in a downgrade of the US sovereign rating,” warns Fitch.           

The agency has also said it is not credible to assume if deficit reduction plans rest solely on further cuts in discretionary spending. Discretionary spending could reach a historic low of 5.5% of GDP by 2021 according to current plans.

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