As Washington continues to search for a solution to the quickly-approaching “fiscal cliff,” a combination of tax increases and massive spending cuts set to take effect next year unless Congress comes up with a budget plan, ratings firm Fitch on Wednesday warned that inaction could result in a credit downgrading.
“If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating action,” the agency said in its 2013 global outlook.
“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,” the report adds. “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 triple-A status.”
The only way to avoid a downgrade, the agency argues, is for lawmakers to agree on a deficit reduction plan.
Fitch would then raise its outlook to stable from negative.
“Resolution of the fiscal cliff and an increase in the debt ceiling are pressing issues that the President and Congress must address if the U.S. is to avoid a fiscal and economic crisis,” the report adds.
Wait — Fitch reasons that a downgrade is likely if lawmakers fail to increase the debt ceiling limit?
“In November Fitch Ratings said that President Barack Obama must work toward a credible plan to avoid the fiscal cliff or risk losing its ‘AAA’ rating,” the Associated Press notes.
“Fitch changed its outlook for the U.S. rating to negative last year after Congress and the Obama administration failed to meet a deadline for a plan,” the report adds.
Standard & Poor last year cut the U.S.’ credit ratings from “AAA” to “AA+” after the feds failed to come up with a deficit reduction plan.
“The U.S. has never failed to meet its debt obligations,” the AP notes. “The battle over raising the debt limit in August 2011 went right to the last minute before a compromise was reached.”
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