Fitch Ratings upheld its AAA rating on the United States on Tuesday after lawmakers approved spending cuts that will help avoid a U.S. default, but warned that the world's largest economy must reduce its debt burden or face a downgrade.
The firm said 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."
The vote of confidence from Fitch, however, will not dispel fear that 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 also 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, 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 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, Pam Niimi, Chris Sanders, and Richard Leong)