US downgrade reprieve as Fitch affirms AAA rating

FITCH Ratings affirmed the United States’ top-notch credit rating at AAA, giving the world’s largest economy a reprieve after it was downgraded by Standard & Poor’s little more than a week ago.

Fitch said that the outlook for the rating was stable.

However, it warned that the US was falling behind its peers among the AAA-rated nations on fiscal matters and the country had to show tangible results in its efforts to reduce the budget deficit.

It said it would review its fiscal projections at the end of November and medium-term economic outlook by the end of the year.

“The affirmation of the US AAA sovereign rating reflects the fact that the key pillars of US’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base,” Fitch said in its statement.

“Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks’.”

Financial markets showed little reaction to the news, which also coincided with the release of industrial output data.

US government bonds pared some price gains slightly and the dollar edged up to the day’s highs against the yen.

However, Fitch warned the outlook for the rating depended on the economy and the ability of the political process in Washington to reduce the public debt.

“S&P had a very specific basis for their concern which was that there was no long-run plan for budget control,” said Pierre Ellis, senior economist at Decision Economics, New York.

“Fitch certainly is correct with respect to the breadth of the United States’ potential revenue sources... it is putting a little more faith in the common sense of Congress and the administration with respect to getting the budget situation under control.”

Fitch said that an upward revision to medium-to-long-term projections for public debt either as a result of weaker-than-expected economic recovery or failure of the joint committee to agree on at least $1.2 trillion in deficit reduction would likely put the UU on negative outlook.

“The rating action would most likely be a revision of the rating outlook to negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade,” the statement said.