Fitch: Fiscal Cliff Threatens Triple-A Rating

Fitch Ratings Managing Director David Riley appeared yesterday on Bloomberg Television, suggesting that the fiscal cliff could threaten the U.S.'s AAA credit rating. While Fitch did not join S&P last August in downgrading the U.S. after the debt ceiling debate, it has kept the U.S. on a negative outlook, indicating that it could change its position in the next 12 months. S&P reaffirmed its AA+ rating with a negative outlook while Moody's has kept the U.S. at its highest rating but with a negative outlook. Riley was hopeful that Congress and the President will come together to find a compromise, but the risk of the fiscal cliff still remains a great concern.

You have a situation in which the U.S. could go into recession, potentially quite a bad recession, which is totally avoidable and totally unnecessary. The extent of taking money out of the economy through fiscal contraction doesn't need to be as severe as the fiscal cliff would imply.

All three of the rating agencies have warned about the dangers of the fiscal cliff and the potential recession that could follow. But Riley's statements suggest that if left unresolved the cliff could lead to the U.S. losing its AAA rating.

In terms of the rating, they need to address this issue of tax and spending. They need to make some decisions on that. They need to set out some kind of plan to address the deficit and debt in a sensible way. We are not looking for slash and burn; we are talking about a sensible reduction. If they can’t really put that together in the first half of 2013, there is a significant threat to the loss of the triple-A rating from Fitch.

Congress does not have to choose between the extremes of falling off the cliff or the alternative of avoiding it without any long-term debt measures. A comprehensive plan that gradually phases in changes but achieves the goal of eventually reducing the size of our debt as a share of the economy would reassure rating agencies -- as well as household and businesses -- about our country's finances. But it has to be credible.