Published January 15, 2013
The United States faces a "material risk" of losing its triple-A status if there is a repeat of the wrangling seen in 2011 over raising the country's self-imposed debt ceiling, credit ratings firm Fitch said on Tuesday.
Fitch also said Spain will continue to face downgrade risks even if it avoids having to ask for a bailout, while Ireland could claw its way back into the single-A rating band if a deal is struck to share the burden of its banking debts.
Despite December's deal by U.S. politicians to avoid the so-called "fiscal cliff" of spending cuts and tax hikes, Fitch's head of sovereign ratings, David Riley, said pressure on the country's rating was increasing.
"If we have a repeat of the August 2011 debt ceiling crisis we will place the U.S. rating under review. There will be a material risk of the U.S. rating coming down," Riley said at a conference hosted by the firm.
Fitch currently assigns the United States its highest rating of AAA, but with a negative outlook.
Standard & Poor's has already downgraded the world's biggest economy, lowering the United States to AA+ in August 2011 - a move which appears to have done little to dull the attraction of U.S. bonds for investors. Moody's Investors Service shifted the outlook on its Aaa rating to negative in the same month and has kept it there ever since.
Riley said the United States did not need the same kind of super-strength austerity some major developed economies are currently implementing because it was grinding out more economic growth than other high-debt nations.
But he warned a repeat of the 2011 squabble would undermine confidence in Washington.
"It is a concern that these self-inflicted crises are seeing us stagger every six months to a new deadline," Riley said.
"That uncertainty over economic and fiscal policy is something that is not typically characteristic of triple-A, and more substantively we think it is weighing on the prospects for growth and the recovery."
EURO ZONE FORTUNES DIVERGE
On BBB-rated Spain, Riley said the downgrade risks were its ability to deliver on deficit reduction, the cost of bank recapitalization and, most significantly, economic performance.
"It's the economy. If this time next year the expectation is for another 1.5 or 2 percent contraction in the economy and unemployment getting towards 30 percent, it's very bad times," Riley said.
"Those are the drivers, even if in that scenario they are still able to fund themselves in the market because of the specter of OMT."
The European Central Bank has committed to make unlimited purchases of government bonds, known as Outright Monetary Transactions (OMT), to support any euro zone sovereign that enters into an international bailout program.
The promise of a backstop has helped slash the cost of borrowing for indebted euro zone sovereigns such as Spain since it was announced by the ECB in September.
A poll of 162 investors present at the conference showed that 57 percent expected Spain to request a bailout in 2013.
There was a more positive scenario for Ireland, which was bailed out by the European Union and International Monetary Fund in 2010 when the cost to the state of rescuing the country's banking sector spiraled.
If these debts could be shared out among euro zone states through the region's bailout mechanisms there could be scope for Ireland's BBB-plus rating to rise into the single-A category, according to Fitch analyst Douglas Renwick.
"If there is an element of risk sharing, say perhaps through the ESM (European Stability Mechanism) over a bit of time, it could rise back to the single-A (range)," Renwick said.