Here we go again, another day, another piece of bad economic news. On August 6, 2011, just four short days after Congress agreed to raising the debt ceiling in order to avoid default and a credit down grade, the U.S. economy was downgraded from AAA to AA by Standard and Poor's anyway. Fast forward a few months and credit ratiing firm Fitch isn't going so far as to bring down America's AAA rating, but they have turned the U.S. economic outlook to negative. With the national debt balooning to over $15 trillion recently and the failure of Congress and the President to cut anything, the move isn't surprising. Fitch isn't ruling out the possibility of a downgrade of the U.S. credit score in the next two years.
Fitch Ratings kept its pristine AAA rating on the U.S. on Monday, but the credit-ratings company downgraded its outlook to “negative” in the wake of the Supercommittee’s failure to find $1.2 trillion in spending cuts.
The development, which had been hinted at last week, could have been worse for the U.S. as McGraw-Hill’s (MHP: 41.20, +0.66, +1.63%) Standard & Poor’s slashed its credit rating for the first time ever in August.
However, the negative outlook indicates a “slightly greater” than 50% chance that Fitch downgrades the U.S. over the next two years.
“Failure to reach agreement in 2013 on a credible deficit reduction plan and a worsening of the economic and fiscal outlook would likely result in a downgrade of the U.S. sovereign rating,” David Riley, a managing director at Fitch, said in the report.
Fitch warned that its revised fiscal projections call for federal debt held by the public to exceed 90% of gross domestic product and debt interest payments making up more than 20% of total tax revenues by the end of the decade.
“In Fitch's opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its 'AAA' status despite its underlying strengths,” Riley said.
But how does Fitch suggest the U.S. fix the debt problem? By reforming entitlements of course.
However, Fitch warned that further deficit reduction efforts “will not be credible” if they solely rely on cutting discretionary spending. Economists have said Congress needs to quickly move to slash entitlement spending on programs such as Social Security, Medicare and Medicaid.
Over to you, Paul Ryan:
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