Is a U.S. Credit Rating Downgrade a Sure Thing?

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Fitch Ratings Inc. cautioned today (Wednesday) that it may downgrade the U.S. credit rating – currently AAA, the highest ranking – if Congress doesn't reach a fiscal cliff deal.

The ratings agency said if negotiations on both the fiscal cliff and the debt ceiling extend into 2013, Fitch will review the credit rating which may lead "to a negative rating action."

"Failure to avoid the fiscal cliff…would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the U.S. into an avoidable and unnecessary recession," Fitch wrote in its 2013 global outlook. "That could erode medium-term growth potential and financial stability. In such a scenario, there would be an increased likelihood that the U.S. would lose its AAA status."

Fitch's warning is not merely a threat, and it isn't the only rating downgrade facing the United States.

Moody's Corp. (NYSE: MCO), which also currently has a AAA rating in place and maintains a negative outlook, advised in September that it was prepared to strip the country of its stellar rating if lawmakers don't come up with a long-term debt reduction plan.

Standard & Poor's has been even less lenient.

It trimmed its U.S. credit rating one notch in 2011 to AA+, alluding to the political stalemates that thwarted an agreement on raising the debt ceiling. The downgrade, a first in U.S. history, was harshly criticized, and stunned Washington.

S&P lectured earlier this year that an additional downgrade was likely sans a debt deal.

Joining S&P in stripping the U.S. of its desirable credit rating was Egan Jones, a much smaller but still well-known rival among the big three credit rating agencies. This September, it slashed its rating to AA- from AA.

A U.S. credit rating downgrade is just one important consideration in the debt ceiling debate.

More than the U.S. Credit Rating is in Danger

For over a year, Fitch, Moody's and S&P have been pressuring Congress to rein in spending and create a solid deficit-reduction plan.

But now, the national debt has swelled to just shy of the $16.4 trillion ceiling. It has continued to increase by an average $3.85 billion every day since September 2007.

While raising it is not optimal, not raising it would be worse.

Not raising the debt ceiling would cause the government to default on its legal obligations including Social Security, Medicare, military salaries, interest on the national debt and tax refunds. Such a default would mark an historic first.

The ripple effects would be fast and furious. Jobs would be threatened as would be the savings of average Americans – and a recession would definitely follow.

Should lawmakers hammer out a debt deal and balanced budget by year's end, the U.S. could maintain is AAA credit rating status. In addition, Fitch would then elevate its outlook to positive from negative, a viewpoint cast in 2011 after President Obama and Congress missed a deadline for a debt plan.

Presently, Fitch projects the U.S. economy will tighten spending by 1.5% next year, or 5% if the fiscal cliff automatic spending cuts go into place.

With Washington giving little faith that it is finally capable of hammering out a debt deal, 2013 looks likely to deliver a major hit to the U.S. credit rating.

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