Crisis Passed? Fitch Removes U.S. Credit Downgrade Warning

U.S. Treasury notes

In a rating action report released Friday, Fitch affirmed the United States’ credit ratings at the top-notch AAA with a stable outlook for the future.

“Thanks to the tenacity of the American people and the determination of the private sector we are moving in the right direction,” Treasury Secretary Jacob J. Lew said in the late February report on the U.S. government’s 2013 fiscal year. “The United States has recovered faster than any other advanced economy, and our deficit today is less than half of what it was when President Obama first took office.”

In fact, as a result of both policy measures and the economic recovery, the federal budget deficit fell to 4 percent of the United States’ gross domestic product in the past fiscal year — a significant drop from 6.7 percent in 2012 and 9.8 percent in 2009. This downtick — and more importantly, the mid-February suspension of the federal debt limit — gave Fitch Ratings the impetus to upgrade its outlook on the financial position of the United States, removing the country from a downgrade watch.

The update wiped away the negative rating watch that the agency placed on the country on October 15 of last year, when the U.S. was in the midst of a federal government shutdown. When Republicans and Democrats could not agree on a spending plan for the fiscal year that began October 1, with the funding of the Affordable Care Act as the divisive issue, all but the essential government functions were put on pause.

“The U.S. authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures,” stated Fitch explaining the firm’s decision. “The U.S. Treasury Secretary has said that extraordinary measures will be exhausted by 17 October, leaving cash reserves of just [$30 billion]. Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.” As that explanation suggests, the United States was not only in jeopardy of losing its top credit rating, but the firm believed that Washington’s brinkmanship politics was eroding investors’ confidence in U.S. institutions.

On October 16, President Barack Obama signed the bill that reopened the federal government and increase the debt limit, just hours before the government’s borrowing authority was set to expire. That agreement funded the federal government in place of an annual budget through January 15 of this year and lifted the debt limit through February 7 — meaning in the early weeks of this year lawmakers once-again had to compromise on federal spending.

Early last month, Congress gave its approval to raise the borrowing authority, the first so-called “clean” increase since 2009. But conservatives believed that their top leaders squandered a prime opportunity to deal the nearly $17 trillion national debt. Republican Senator Rob Portman of Ohio — who served as Director of the Office of Management and Budget in the George W. Bush administration — wrote in a piece for Forbes that by signing the clean debt limit increase Obama “chose to turn his back on this tradition, refusing to work with Congress to reduce the deficit as part of a debt limit increase.”

Citing the nonpartisan Congressional Budget Officer, Portman noted that the country’s economic future is in trouble if “Washington continues its borrowing-and-spending spree.” Since Obama assumed the presidency, the federal government has run four years of trillion-dollar deficits, and now CBO says there will be permanent trillion-dollar deficits returning within the decade — a decade in which the record national debt is projected to expand by another $10 trillion,” he wrote. “When it comes to our nation’s finances, we are witnessing a slow-motion train wreck. We can see it coming, and we know exactly what is causing it. “

But Fitch’s ratings indicates a far less grim situation. “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 US, in contrast to the crises in August 2011 and October 2013,” noted the ratings firm. “The suspension is in place until 15 March 2015, beyond which the seasonality of tax payments and use of extraordinary measures might allow the Treasury to fund the government until around July 2015.”

That August 2011 budget standoff prompted Standard & Poor’s to lower its U.S. credit rating to AA+ from AAA; it was the first downgrade in United States history.

Furthermore, the agency also reported that “the debt ceiling crises in August 2011 and October 2013 do not appear to have negatively affected US bond yields or reduced foreign holdings of Treasury securities. Therefore Fitch does not believe the role of the US dollar, sovereign financing flexibility or debt tolerance has been materially damaged.” Had Fitch actually lowered its ratings, it would have likely prompted some forced selling of Treasury bonds as investment rules prevent some institutions from investing in securities that are not rated triple-A by at least two major rating firms.

Fitch has also forecast that the deficit will continue to decline in the coming years, dipping to 2.9 percent this fiscal year and 2.6 percent in the 2015 fiscal year. To be fair, Portman referred to overall government debt — which is growing — when making his dire prediction, while Fitch’s analysis only touched on yearly budget shortfalls. Still, it’s significant that Portman described the United States’ economic future as a slow-motion train wreck, and Fitch stated that growth prospects are robust and “demographic trends less worrisome than in many advanced country peers.” The ratings firm expects the country’s GDP to expand by 2.8 percent this year, which follows 2013’s 1.9 percent increase.

Last June, S&P shifted its rating from negative, citing the shrinking budget deficit and improved economy. But the firm maintained that the U.S. is still years away from its AAA rating. Meanwhile, last summer, Moody’s upgraded its outlook for the U.S. credit rating to stable also thanks to the shrinking budget deficit and improved economy

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