Fitch Takes US Credit Rating off Downgrade Watch, After Debt Deal

Fitch Ratings on Friday upgraded its outlook for the U.S. AAA credit rating, removing the nation from a downgrade watch, after politicians put off another debt-limit battle until next year.

The company, one of three major credit rating firms, changed the outlook for the rating to stable, from a negative watch put in place in October.

Fitch said at that time political brinkmanship over raising the debt limit had increased the risk of a government default, raising the probability of a rating downgrade.

But as part of the deal to end October’s partial federal government shutdown, Congress and the White House suspended the $16.7 trillion debt limit until Feb. 7. Then politicians agreed last month to suspend it again until March 15, 2015.

“The federal debt limit was suspended in mid-February in a timely manner, and in a way that avoided casting uncertainty over the full faith and credit of the U.S., in contrast to the crises in August 2011 and October 2013,” Fitch said in a report Friday.

The debt-limit standoff in 2011 led Standard & Poor’s to lower its U.S. credit rating to AA (plus) from AAA. It was the first downgrade in the nation’s history.

Fitch and Moody’s Investor Services retained their AAA U.S. ratings at the time, but put them on a negative outlook. The move meant a downgrade could take place in three to five years.

The debt limit fight last fall, part of a budget dispute that forced many government agencies to close for 16 days, led Fitch to lower its outlook to a negative watch. The designation meant there was a “heightened probability” of a downgrade.

Last month’s debt limit deal was a key reason for upgrading the outlook, Fitch said Friday. The company also cited the improved federal fiscal situation, including the shrinking budget deficit and brightening economic picture.

“Strong fiscal consolidation has been achieved,” Fitch said, a reference to the automatic spending cuts known as the sequester that began last year.

The budget deficit fell to 4 percent of GDP last year from 6.7 percent the previous year and 9.8 percent in 2009, Fitch said. This fiscal year, the company forecasts the deficit to shrink to 2.9 percent of gross domestic product.

A recent two-year budget deal was a sign “there has been some improvement in the coherence of economic policy-making” in Washington, Fitch said. Still, the firm does not expect a broader “grand bargain” on long-term deficit reduction until after the 2016 presidential election.

Fitch described the prospects for U.S. economic growth as “more robust” than many other advanced nations. It forecast the economy would expand by 2.8 percent this year after a 1.9 percent increase in 2013.

In other positive signs, Fitch said the Federal Reserve has started to reduce its stimulus efforts, the U.S. banking system is healthy, and dividend payments from seized housing finance giants Fannie Mae and Freddie Mac have offset the costs of their bailouts.

Last summer, Moody’s upgraded its outlook for the U.S. credit rating to stable, citing the shrinking budget deficit and improved economy.

S&P also shifted its outlook to stable from negative in June for similar reasons, but warned the U.S. was still years away from regaining its AAA rating.

This article appeared in print in the March 24th, 2014 edition of Hamodia.