Fitch Reminds Us What Lawmakers Must Do

While last night election is still many people's mind, the rating agency Fitch reminds us of the tremendous stakes of these next couple of months. In a statement, Fitch warned that without a comprehensive deal, the U.S. could lose its 'AAA' rating, just as it did last year from S&P.

The economic policy challenge facing the President is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the US. Resolution of these fiscal policy choices would likely result in the US retaining its ‘AAA’ status from Fitch. As reflected in the Negative Outlook on the rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 2013.

No doubt, those who have just been relected or elected for the first time have their own policy agendas that they would like to see through. But as Fitch reiterates, there will be no greater issue in the next year than the decisions we must make on fiscal policy.

Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilise federal debt over the medium term, consistent with the US retaining its ‘AAA’ status. Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch.

From an economic and sovereign credit perspective, the most important policy priority for the President and Congress is reaching agreement on a deficit reduction plan backed by clear targets and specific tax and spending measures that would firmly place US public finances on a sustainable path over the medium to long term. In Fitch’s opinion, such a plan would significantly reduce the uncertainty that currently characterises federal tax and spending policies and underpin a sustainable economic recovery and confidence in the full faith and credit of the federal government.

Fitch has previously indicated that it could downgrade the U.S. if it does not address its fiscal situation, but so far we have not made any progress. We may already see Congress begin to focus its attention on the cliff, with the House Speaker, John Boehner (R-OH), set to hold a press conference in a few hours to possibly enumerate on ways to avoid a fiscal cliff. Hopefully, we can count on our politicians to resolve this pressing issue in a timely, efficient, and bipartisan manner.

Click here to read the statement.