LONDON (MNI) – Re-elected U.S. President needs to urgently get
agreement on avoiding the fiscal cliff and securing debt reduction,
Fitch Ratings warns today.

Fitch warns that without such measures the U.S. will face a
downgrade in 2013.

A full text of the Fitch statement follows:

“The newly re-elected US President Barack Obama will need to
quickly secure agreement on avoiding the ‘fiscal cliff’ and raising the
debt ceiling following Tuesday’s elections, Fitch Ratings says.

“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.

“The fiscal cliff – some USD600bn of tax increases and spending
cuts that come into effect on 1 January 2013 – and an increase in the
debt ceiling are pressing issues that the President and Congress must
address in the coming weeks if the US is to avoid a fiscal and economic
crisis. Fitch estimates that the fiscal cliff would tip the US economy
into an unnecessary and avoidable recession and result in an increase in
the unemployment rate to above 10% in 2013.

“In Fitch’s opinion, the tax increases and spending cuts implied by
the fiscal cliff would not fully address the longer-term drivers of
higher public spending and the relatively narrow and volatile tax base.
Moreover, the fiscal cliff would likely be at least partially reversed
by Congress as the economy slowed and unemployment began to rise,
perpetuating the uncertainty over government tax and spending policies
that has weighed on the economic recovery.

“Fitch is currently projecting substantial deficit reduction
equivalent to around 1.5% of GDP in 2013 as part of a medium-term
deficit reduction strategy. On current projections, the Treasury
Secretary will likely have to implement extraordinary measures by
year-end to maintain borrowing capacity under the current debt ceiling
of USD16.394trn. Failure yet again to reach agreement on raising the
debt ceiling in a timely manner – not Fitch’s expectation – would
undermine confidence in the United States as a reliable borrower and
thus its ‘AAA’ status, prompting a formal review of the US sovereign
rating.

“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 placed the US ‘AAA’ rating on Negative Outlook on 28
November 2011, following the failure of the Congressional Joint Select
Committee on Deficit Reduction to reach agreement on at least USD1.2trn
of deficit-reduction measures. The failure of the so-called
Super-Committee to reach agreement eroded Fitch’s confidence that timely
fiscal measures necessary to place US public finances on a sustainable
path consistent with the US ‘AAA’ status would be forthcoming. Further
prevarication would undermine the economic recovery and mean that
federal debt would continue to rise over the foreseeable future.

“Federal debt held by the public currently stands at around 75% of
GDP, its highest level since 1950. Without policy action, it will reach
90% of GDP by the end of the decade and continue to rise towards
unsustainable levels. Assuming that the fiscal cliff is avoided and
there is a timely increase in the debt ceiling, Fitch expects to resolve
the Negative Outlook on the US ‘AAA’ sovereign rating in late 2013.
Failure to reach agreement on the fiscal cliff and debt ceiling would
likely trigger a rating downgrade before then.

“The presidential election underscored the broad political and
public recognition of the importance of addressing the federal
government deficit and stabilising government debt – the challenge
facing President Obama and Congress is to address head-on the hard
choices on tax and spending”.

-London Bureau; tel: +442078627492; email: dthomas@mni-news.com

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