Fitch Ratings affirmed its AAA rating on the U.S., saying a downgrade is unlikely in the near term thanks to the dollar’s role as a global reserve currency and a steady demand for U.S. Treasurys by foreign investors.
Amid rising concerns among investors and criticism from the Republican party about a ballooning budget deficit, Fitch’s big support to the U.S. comes with a caveat: the U.S. government faces medium term fiscal challenges in the light of growing debt and falling revenues.
“The near-term risk to the…AAA status is minimal given its exceptional financing and economic flexibility and the U.S. dollar’s role as the world’s predominant reserve currency,” said Brian Coulton, Fitch’s primary analyst for the U.S.
Keeping a coveted-AAA rating means that the U.S. will be able to tap the markets at lower borrowing costs at a time when it needs to finance its stimulus program to pull the economy out of its worst recession in decades.
“This (rating affirmations) should certainly not be taken as a ringing endorsement of U.S. fiscal performance and prospect, far from it, but really is just a recognition of the reality (that) the U.S. continues to play a very special role in the global economy and global financial system,” Coulton said during a conference call to discuss the rating action.
The U.S. Treasury Department said it had no comment on Fitch’s affirmation.
Despite its slide against major rivals in 2009, the dollar remained the dominant global reserve currency. Data released by the International Monetary Fund on Dec. 30 showed the amount of allocated reserves held in U.S. dollars stood at $2.73 trillion at the end of the third quarter 2009, an increase from $2.68 trillion in the second quarter. The data showed U.S. dollar reserves account for 61.65% of allocated reserve holdings.
Ample liquidity in the U.S. credit markets also serves as a buffer to the credit ratings of the world’s biggest economy, Fitch said. The U.S. government bond market turnover averages $5 billion a day, Coulton noted, while the U.S. dollar accounts for about 86% of global currency trade, thus he sees “no threats in the medium or long-term horizon” to the greenback’s role as a global reserve currency.
The government’s unparalleled financing flexibility enhances debt tolerance even relative to other large AAA-rated sovereigns, Fitch said in a statement.
“The exceptional financing flexibility does not on its own guarantees untouchable AAA status,” Coulton said.
The rating agency gave the U.S. government a clear warning: it must make “difficult decisions” to restore investor confidence in its debt.
“In the absence of measures to reduce the budget deficit over the next three-to-five years, the government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the U.S.’ AAA status,” Coulton said.
Fitch forecasted the U.S. general government’s deficit to reach 11% in 2010 and 8.5% in 2011. The rating agency estimated the deficit to have reached 11.4% in 2009.
Meanwhile, the U.S. public debt on a general government basis – which consolidates federal, state and local debt – will rise to 89% of gross domestic product in 2010 and to 94% of GDP in 2011, Fitch estimated. U.S. public debt is forecast to have reached 79% in 2009, the highest level among AAA-rated sovereign borrowers, according to Fitch.
“A 100% figure for the federal government debt…would be a serious concern from the perspective of the U.S. AAA rating,” said Coulton. He expects the U.S. economy to resume growth this year, expanding 2.4%.
The currency markets showed no significant impact on the U.S. ratings affirmations, with the euro trading at $1.4517 early Monday afternoon in New York, from $1.4414 late Friday.
“This news from Fitch is a welcome step, but I think there is the expectation that sometime in the next couple years, the ratings agencies expect the U.S. will begin to put its fiscal house back in order,” said John Canally, economist and investment strategist for LPL Financial in Boston, which oversees $246 billion in assets.
Fitch added that the U.S. external debt burden, its current account deficit and the high share of non-resident holdings of government debt “increase the potential for volatility in U.S. asset prices if foreign investors were to become concerned about public debt sustainability or risks to the credibility of the monetary policy framework.”
Standard & Poor’s and Moody’s Investors Service also assign AAA-ratings to U.S. government debt, with a stable outlook.
By Fabio Alves – wsj.com
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