The U.S. lost its last stable outlook from the three biggest credit-ranking companies after Fitch Ratings lowered the nation to negative following a congressional committee’s failure to agree on deficit cuts.
Fitch’s outlook on the U.S., which it still assigns its top AAA grade, reflects declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming, the company said in a statement Monday. Standard & Poor’s and Moody’s Investors Service said Nov. 21 that the so-called supercommittee’s inability to reach an agreement didn’t merit a downgrade because the inaction will trigger $1.2 trillion in automatic spending cuts.
U.S. government debt rallied the most since the end of 2008 after Standard & Poor’s stripped the U.S. of its AAA ranking on Aug. 5, while global equities lost $9.7 trillion in market value during that period. Even with lawmakers reluctant to embrace the automatic cutbacks that helped prevent downgrades, President Barack Obama has pledged to veto any efforts to undermine the spending reductions.
“In terms of additional information, a Fitch negative outlook doesn’t seem that significant,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the announcement. “A negative outlook from Fitch just adds one more voice to the chorus of a slowly deteriorating U.S. fiscal situation.”
The 10-year yield rose one basis point, or 0.01 percentage point, to 1.98 percent at 4:19 p.m. New York time, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index rose 2.9 percent.
The 12-member bipartisan committee, created in August by the Budget Control Act that raised the U.S. debt ceiling, reached an impasse amid Democrats’ opposition to reductions in programs such as Medicare and Republicans’ reluctance to increases in tax revenue.
The panel’s implosion is likely to delay any major deficit- reduction agreement until after the next presidential election and may pose an immediate threat to the struggling U.S. economy. The lack of a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.
The U.S. downgrade to AA+ from AAA by S&P followed months of political gridlock about deficit cuts as the government almost reached its borrowing limit. The rating company slammed the country’s political process and criticized lawmakers.
New York-based S&P’s August decision was flawed by a $2 trillion error, according to the Treasury Department. S&P disputed the Treasury’s assertions and said using the department’s preferred spending measures in its analysis didn’t affect its credit grade. S&P was criticized by Obama and Berkshire Hathaway Inc. Chairman Warren Buffett, who said the U.S. should have been upgraded to “quadruple-A.”
The $1.3 trillion U.S. budget deficit in the fiscal year ended Sept. 30 was about 8.7 percent of gross domestic product, the third-largest percentage in the past 65 years, exceeded only by the deficits in 2009 and 2010, according to Treasury statistics. U.S. marketable debt outstanding has doubled to about $9.7 trillion since the end of 2007 as tax receipts plunged and the government boosted spending amid the worst recession since the Great Depression.
“It’s certainly a hit to market sentiment and confidence that nothing was done,” Eric Stein, a money manager in Boston at Eaton Vance Management, which oversees $203 billion, said Nov. 21 in a telephone interview. “It’s one more piece of bad news in addition to the other bad news that the market’s been digesting.”
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