Fitch upheld its AAA rating on the United States on Tuesday after lawmakers approved spending cuts to avoid a U.S. default, but it warned the world's largest economy must cut its debt burden to avoid a future downgrade.
The credit rating firm said that while the agreement means default risk is extremely low, the United States must also confront tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut to safer levels over the medium term.
David Riley, Fitch Rating's primary analyst for the United States, told Reuters the firm would not rule out slapping a negative outlook on the rating when it concludes its review later this month.
Riley said the ongoing review will take into account the positive outcome of a debt agreement achieved by lawmakers on Tuesday and prospects for the U.S. economy, which have disappointed Fitch.
The downward revisions of the GDP were bigger than we expected and a source of concern, Riley said. There could be a rating action which could include a revision of the outlook. I certainly couldn't rule that out.
Fitch considered the debt agreement a step in the right direction that shows Washington has the political will and capacity to ultimately do the right thing.
But such a vote of confidence from Fitch did not dispel fears ratings agency Standard & Poor's will cut the nation's top-notch rating.
Although the bill removes the threat of imminent default by raising the national debt limit enough to last until 2013, its cuts are only about half the $4 trillion in savings that ratings agencies Standard & Poor's and Moody's have said would be enough to confirm the country's triple-A rating with a stable outlook.
Even after a bruising battle in Congress to complete a $2.1 trillion deficit reduction deal, Fitch said the AAA status remains strong.
Despite the Fitch statement, investors continued to move to safer assets. U.S. Treasuries added to gains and Wall Street stocks and the dollar were stuck in negative territory.
The dollar, already falling against the Swiss franc after weak economic data, fell to an all-time low in the wake of Fitch's statement. However, the greenback held steady against the euro, which is struggling with a sovereign debt crisis of its own.
Other ratings agencies have warned of a potential downgrade of U.S. credit depending on the scope and size of the deficit cutting agreement.
The more important question here is whether the bill will be enough to appease S&P, which wanted $4 trillion in cuts, with many in the market believing that there is a realistic chance of a downgrade from S&P, said Gennadiy Goldberg, fixed income analyst at 4Cast Ltd. in New York.
Fitch noted that without significant changes in fiscal policy, The U.S. federal, state, and local debt as a percentage of gross domestic product will reach 100 percent by the end of 2012, and will continue to rise over the medium term -- a profile that is not consistent with the United States retaining its AAA sovereign rating.
The firm expects U.S. federal debt-to-GDP levels alone to reach 70 percent by the end of this year, and increase over the next 15-20 years into the mid-80 percent range.
In comparison, Fitch says debt-to-GDP levels are at 191.8 percent in Japan, 148 percent in Greece, 88 percent in Portugal, 73 percent in France, 50.9 percent in Spain, and 44.1 percent in Germany.
The agreement is an important first step but not the end of the process toward putting in place a credible plan to reduce the budget deficit to a level that would secure the United States' AAA status over the medium-term, Fitch said.
The firm said it expects to conclude its scheduled review of the U.S. sovereign rating by the end of August.
(Reporting by Daniel Bases, Walter Brandimarte, Pam Niimi, Chris Sanders and Richard Leong; Editing by Andrew Hay)