Ratings Agency Threatens Downgrade If Compromise Isn't Reached by January 1st

Rating meter going from excellent to good - IllustrationFitch ratings agency repeated a warning on Wednesday morning - if the Democrats and Republicans don't come together and strike a deal quickly to avoid the "fiscal cliff", the nation's pristine AAA credit rating may be in danger of receiving a downgrade.

Fitch said that they are expecting a compromise to be reached by January 1st - however, if talks between the two sides break down and the standoff appears 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."

Fitch, along with Moody's, currently has a AAA rating for the United States. Having said that, they do have a "negative outlook" for the United States, meaning that a downgrade could come at any time.

Standard & Poor's shocked the world by downgrading the US credit rating in the summer of 2011 to AA+ from AAA. At the time, S&P blamed the downgrade on the fact that the United States had missed the opportunity to "stabilize the government's medium-term debt dynamics" after the debt ceiling crisis that had taken place earlier that summer.

At the time, Moody's and Fitch elected to maintain their AAA credit ratings for the United States, but warned that downgrades might be coming.


President Obama and House Speaker John Boehner continue to negotiate towards a deal that would avoid the impending "fiscal cliff". The "fiscal cliff" is a mixture of the expiration of tax provisions (such as the Bush tax cuts and payroll tax cut) and implementation of automatic spending cuts that would likely wreak havoc over an already fragile economy. The CBO has warned that if the country goes over the fiscal cliff, a recession would likely follow.

The Republicans appear likely to move off of their "no tax increases" position, but only if higher taxes are accompanied by significant reforms to entitlement programs. Boehner apparently offered to let the Bush tax cuts expire for those making over $1 million per year, but the White House has apparently said that there isn't enough in terms of revenue increases in that proposal. The Republicans have also proposed a reforming of the tax code, including the limiting of certain tax deductions, as a way of increasing revenues.

The White House appears willing to compromise on the Bush tax cuts (they think that they should expire for anybody making over $250,000 per year), but wrangling continues over cuts to entitlement programs, emergency unemployment benefits, the payroll tax cut and the debt ceiling. It appears likely that the debt ceiling and automatic spending cuts issues will be pushed back a year, but negotiations continue on all of the other issues.

It appears likely that a deal will be struck before January 1st. If not, Fitch warns, another downgrade of American's pristine credit rating may be coming.

Source: CNN.com - Fix fiscal cliff or risk downgrade, says Fitch

Filed under: General Knowledge

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