Fitch Ratings reiterated on Thursday it would cut its sovereign credit rating for the United States next year if Washington cannot come to grips with its deficits and create a “credible” fiscal consolidation plan.
It also said it would immediately cut the credit ratings on Cyprus, Ireland, Italy, Spain and Portugal if Greece were to exit the eurozone. Additionally, all eurozone nations would have their ratings put on its negative ratings watch list, setting a six-month time frame for a potential downgrade.
Europe’s ongoing sovereign credit crisis undermines already below-trend growth seen in the United States, the world’s biggest economy.
“The United States is the only country (of four major AAA-rated countries) which does not have a credible fiscal consolidation plan,” and its debt-to-GDP ratio, or how much debt it has relative to the size of the economy, is expected to increase over the medium term, Ed Parker, sovereign ratings analyst, told a Fitch conference in New York.
Lower credit ratings typically lead to higher borrowing costs, putting more strain on government balance sheets already straining to cut spending without sending their economies into a tailspin.
Only in the last week have European leaders broached the prospect of closer economic and political ties to overcome the crisis which has forced severe austerity budgets on Europe’s citizens. German and European Union officials are looking into ways to rescue Spain’s debt-stricken banks even though Madrid has not called for aid and resisted international supervision.
voter backlash returned a socialist government in France and boosted the chances for the same in Greece which could put its 130-billion-euro international bailout plan in jeopardy.
Fitch revised down its credit outlook for the United States to negative in November from stable after a special congressional committee failed to agree on at least US$1.2-trillion in deficit-reduction measures.
At the time it said there was a chance for a U.S. downgrade in 2013, saying the failure of the committee increases the fiscal burden on the next administration.
A change in an outlook sets a 12-18 month time frame for making a decision. A negative outlook signifies there is a greater than 50% chance for a downgrade, and vice versa if the outlook is positive.
“The United States is the only one of the four largest economies whose debt as a percentage of GDP is expected to increase over the next five or six years,” Parker said, referring to the United States, Britain, Germany and France.
The U.S. economy’s growth rate in the first quarter was revised down last month to 1.9% from a prior estimate of 2.2% as businesses restocked shelves at a moderate pace and government spending declined sharply. It grew 3.0% in the fourth quarter of 2011.
Standard & Poor’s made history in August 2011 when it cut the U.S. credit rating to AA-plus from AAA. It has held it with a negative outlook ever since.
Moody’s Investors Service has the United States rated at Aaa, also with a negative outlook as of November last year.
All three of the ratings agencies have said they essentially do not expect much change in the U.S. budget situation or fiscal position until after the November presidential election.
The negative outlook from S&P gives it a six-to-24-month window for making a decision while Moody’s defines its time frame as 12 to 18 months.
Fitch respects the size and flexibility of the U.S. economy but the “rising trajectory” of its debt could lead to the same kind of economic stagnancy that has long plagued Japan, Parker said.
Parker said Fitch considers credible the current fiscal plans for Britain, France, Germany and other major AAA-rated nations.
However, he did warn that the firm could cut Britain’s AAA rating if there is a “further material downturn” in its economy.
Fitch, in March, put Britain on a negative outlook, similar to Moody’s Investors Service. S&P has a stable outlook on it.
Parker said Britain, unlike Germany and France, is the most sensitive of Europe’s large economies to the fallout from a Greece exit.
“The eurozone is the U.K.’s biggest export market” and has many banks with exposure to peripheral countries in the region, Parker said on the sidelines of the conference.
Fitch rates Spain the highest of the three agencies at A, followed by Italy at A-minus; Ireland at BBB-plus; Cyprus at BBB-minus. All of these are at investment grade, save for Portugal’s junk status BB-plus rating. However, all of these ratings currently have a negative outlook.