Is the U.S. in Downgrade Danger?

The United States and Spain are heading toward potential rating downgrades by Fitch. The credit ratings firm said Tuesday that the U.S. faces a “material risk” of losing its triple-A status if the August 2011 debt ceiling crisis is repeated, and Spain will continue to face risks of a downgrade even if a bailout is avoided, Reuters reported.

Congress’s resolution of the tax hikes and spending cuts known as the fiscal cliff at the end of December did little to convince Fitch’s head of sovereign ratings, David Riley, that the pressure on the country’s rating was decreasing. He warned that another debt ceiling dispute would weaken confidence in Washington.

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“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,” Riley told the publication.

There is now a “material risk” that United States will lose its triple-A rating…

Standard & Poor’s downgraded the United States to a AA+ following the 2011 crisis, a move that Reuters commented did “little to dull the attraction of U.S. bonds for investors.” At the same time, Moody’s Investors Service adjusted its outlook on the United States’ Aaa rating to negative, which has not changed. Fitch currently rates the U.S. at its highest level of AAA, but with a negative outlook.

Whether or not Fitch downgrades Spain depends on whether the country can reduce its deficit, lower the cost of bank recapitalization, and improve its economic performance, Riley told Reuters.

“It’s the economy,” Riley said of the BBB-rated Spain. “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.”

But for Ireland, which was bailed out by the European Union and the International Monetary Fund in 2010, the outlook is much more positive. Fitch analyst Douglas Renwick told the publication that if the country’s debts can be spread among the member states of the euro zone, Ireland’s BBB-plus rating could be lifted to the single-A category.

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