Why Fitch Could Downgrade the U.S. – And Why They’re Right to Do So

As with most events in life, timing was everything.  Fitch Ratings, Ltd. released a statement Tuesday announcing its intention to lower the U.S. credit rating unless the Administration and Congress can incorporate responsible fiscal policy (i.e., a balanced budget) into the upcoming debt ceiling debate. The press release took on special meaning in light of the presidential press conference less than 24 hours before, during which Obama pledged to ignore any deals from Congress matching the debt-ceiling increase with equal spending cuts. According to Fitch, though, a simple increase in the debt limit won’t keep Washington out of trouble this time. In a scathing review of current budgetary policy, the agency wrote:

In Fitch’s opinion, the debt ceiling is an ineffective and potentially  dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.

Simply put, it’s time to stop kicking the can down the road. Fitch is merely adding an official veneer to what many Americans are already demanding: responsible, conservative solutions that cut spending and help reduce the already enormous federal debt. Despite this, President Obama doesn’t appear willing to play ball. This is not how to build investor confidence in America, and would do little or nothing to stave off concerns that America’s economy is no longer the sure bet it once was. Unfortunately, the debt has now grown large enough to offset even the strongest confidence in America’s other economic factors (including a healthy private financial system and a stable political environment). As Fitch correctly noted:

The U.S. ‘AAA’ status is underpinned by the country’s relative economic dynamism and potential….These fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt. In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current Negative Outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted [Emphasis mine].

Fitch isn’t to blame for any future loss in investor confidence; Congress and the Administration are, as a result of their unwillingness to confront the politically uncomfortable issue of government spending. Clearly, America’s debt crisis cannot be solved by simply raising the debt ceiling and passing the issue on to a later group of politicians. Fitch has sent an unambiguous message to Washington: fix the issue now with a balanced budget, before considering any debt ceiling increases. But will anyone listen?

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