Ratings agency Fitch reaffirmed the United States’ top credit rating on Monday, but downgraded the outlook to negative as it projected slow growth, political stalemate and rising levels of debt this decade.
Citing “still strong economic and credit fundamentals,” Fitch nonetheless said that the recent failure of Congress to reach a short-term deficit cutting deal could delay more fundamental reforms.
Fitch added that there was “considerable uncertainty surrounding the economy’s potential output.”
Taken together, political failures and slower growth could result in a full-fledged downgrade.
“The negative outlook indicates a slightly greater than 50 percent chance of a downgrade over a two-year horizon,” it said.
A spokeswoman for the U.S. Treasury, Colleen Murray, said the move was a “reminder of the need for Congress to reduce the country’s long-term deficit in a balanced manner and to avoid efforts that would undo the $1.2 trillion in automatic cuts negotiated last summer.”
Fitch said a key trigger would be the government’s failure to reach agreement in 2013 on a “credible deficit reduction plan” as the economy slows. That, Fitch said “would likely result in a downgrade of the U.S. sovereign rating.”
“The longer productive capacity remains idle and unemployment high, the greater the likelihood that the loss of output (and tax receipts) is greater than currently estimated.”
Fitch said that had “negative implications for the medium to long-term fiscal outlook.”
Fitch projected federal debt would rise to 90 percent of GDP 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.”