French Rating Agency Fitch Affirms US At AAA, Outlook Stable
A French-owned rating agency (the same country that currently has a short-selling ban) just did all it can not to tip the boat. What can one say but "truly a gutsy call." Unlike S&P which looks at such obsolete things as fundamentals and realistic projections, Fitch instead relies on something far more intangible: "its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base." In other words, it's rated AAA... because it is rated AAA. Somehow we doubt Fitch will take the initiative to be the first to downgrade France... That said even Fitch had some pseudo-harsh words: "Despite its exceptional creditworthiness, the fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to 'AAA' peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst 'AAA' sovereigns. However, federal government indebtedness is lower than in other major 'AAA'-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK ('AAA') and France ('AAA')." So, record debt for a AAA-rated country, check, but... AAA-rated. So all is good.
Full Fitch Text:
Fitch Ratings has affirmed the United States (US) Long-term foreign and local currency Issuer Default Ratings (IDRs) and Fitch-rated US Treasury security ratings at 'AAA'. Fitch has simultaneously affirmed the US Country Ceiling at 'AAA' and the Short-term foreign currency rating at 'F1+'. The Outlook on the Long-term ratings is Stable.
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. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks'.
Fitch will review its fiscal projections in light of the outcome of the deliberations of the Joint Select committee (due by end November) as well as its near and medium-term economic outlook for the US by the end of the year. An upward revision to Fitch's medium to long-term projections for public debt either as a result of weaker than expected economic recovery or the failure of the Joint Select Committee to reach agreement on at least USD1.2trn of deficit-reduction measures would likely result in negative rating action. 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.
US sovereign liabilities, both the dollar and Treasury securities, remain the global benchmark and accordingly the US credit profile benefits from unparalleled financing flexibility and enhanced debt tolerance, even relative to other large 'AAA'-rated sovereigns. The US dollar's status as the pre-eminent global reserve currency and depth of the US Treasury market render financing risks minimal and underpin a low cost of fiscal funding.
The US economy remains one of the most productive in the world, reflected in levels of income per head that are substantially higher than the 'AAA' median and other major 'AAA' sovereigns. The institutional, legal and financial infrastructure supports business growth and innovation and Fitch continues to forecast that the US economy (and tax base) will, over the medium term, be one of the most dynamic amongst its high-grade and 'AAA' peers and support the stabilisation and eventual reduction in government indebtedness. Fitch's current assessment is that the US economic recovery will regain momentum and that a period of above trend growth will subsequently be followed by growth of at least 2.25% over the long term.
As underscored by the challenges facing some European governments in securing investor confidence in their long-run solvency, the gap between government cost of borrowing and economic growth - the interest rate-growth differential (IRGD) - is crucial. For the US, the IRGD has historically been more favourable than that faced by its high-grade and 'AAA' peers. Fitch expects this to continue over the medium term as low nominal and real interest rates persist, underpinned by the US's dollar's continued pre-eminence as the global reserve currency and Fitch's assessment of medium-term growth prospects relative to peers.
Despite its exceptional creditworthiness, the fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to 'AAA' peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst 'AAA' sovereigns. However, federal government indebtedness is lower than in other major 'AAA'-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK ('AAA') and France ('AAA').
Fitch's analysis of the Budget Control Act (BCA 2011) passed into law on August 2 implies USD4.1trn of deficit reduction over the ten years to 2021 relative to the Congressional Budget Office (CBO) 'alternative fiscal scenario' and Fitch's previous basecase projections and, if fully implemented, would bring US public finances materially closer to a sustainable path. Because the BCA 2011 sets absolute caps on discretionary spending relative to the CBO March 2011 baseline, the overall level of savings on discretionary spending relative to the CBO's alternative fiscal scenario (ie. the 'current or no policy change' scenario) is USD2.9trn. Combined with the USD1.2trn of spending cuts implied by automatic across-the-board spending cuts ('sequestration') in the event that the Joint Select Committee does not reach agreement, the BCA 2011 implies at least USD4.1trn of deficit reduction relative to the CBO's 'alternative fiscal scenario'.
The BCA 2011 has tasked a bi-partisan Congressional Joint Select Committee to agree USD1.5trn of deficit-reduction measures by end-November 2011. In the event that the joint committee fails to secure a majority agreement on deficit reduction measures of at least USD1.2trn that could be enacted by January 15 2012, the Act stipulates automatic across-the-board cuts to spending split evenly between security and non-security programs beginning in FY2013. The automatic cuts would be targeted to reduce the deficit by USD1.2trn over the nine years to FY2021. Social Security, Medicaid and unemployment insurance programs would be exempt from 'sequestration' and revenue measures are not part of this 'enforcement mechanism'. However, the 'sequestration' would only come into effect from January 2013 and could be over-turned by the existing or future Congress and Administration.
Fitch currently projects federal debt held by the public and gross general government debt stabilising in the latter half of the decade at 85% and 105% of GDP, respectively, higher than for any other currently 'AAA'-rated sovereign. In Fitch's opinion, this is at the limit of the level of government indebtedness that would be consistent with the US retaining its 'AAA' status despite its underlying strengths. Higher levels of indebtedness would limit the scope for counter-cyclical fiscal policies and the US government's ability to respond to future economic and financial crises.
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