Fitch Ratings: America's Debt Outlook Goes Negative

As expected, the failure of the Super Committee has triggered the resumption of downgrades to America’s credit rating.  Standard & Poor’s famously donwngraded us already, while the other two big agencies, Fitch Ratings and Moody’s, said they were waiting to see how the Super Committee turned out.

Having witnessed the clown car antics of a committee that couldn’t reach an agreement to shave $1.5 trillion in deficits from $44 trillion in projected 10-year spending, Fitch Ratings announced on Monday that it was changing U.S. credit outlook to “negative.”  Wisely, they’ve conceded that the odds of meaningful deficit reduction under the current President are zero, so they’re giving the next President one year to get a plan on the table before they pull the trigger and downgrade us to AA instead of the solid-gold AAA rating we have thus far enjoyed.

Downgrading America’s credit rating is clearly something the agencies really don’t want to do.  Reuters has a report that shows how mightily analysts are striving to spin this into less-than-awful news:

“The negative outlook reflects Fitch’s declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. AAA sovereign rating will be forthcoming,” the ratings agency said in a statement, adding that the chance of a downgrade is “slightly greater than 50 percent” now.

The news had little market impact, as a negative outlook from Fitch was widely expected.

“What it shows is that Fitch is putting the U.S. on warning that this cannot go on forever,” said Michael Yoshikami, chief investment strategist at YCMNET Advisors in Walnut Creek, California.

“The markets already assumed this was going to happen. It would be different if it was a downgrade but a negative outlook is not the end of the world.”

No, it’s a warning that 2013 will be the end of the world.  Moody’s, the third big credit agency, already put U.S. debt on a negative outlook back in July.  Here’s what they said at the time:

Moody’s placed the rating on review for possible downgrade on July 13 due to the small but rising probability of a default on the government’s debt obligations because of a failure to increase the debt limit. The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, prompting the confirmation of the rating at Aaa.

In confirming the Aaa rating, Moody’s also recognized that today’s agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run. The legislation calls for $917 billion in specific spending cuts over the next decade and established a congressional committee charged with making recommendations for achieving a further $1.5 trillion in deficit reduction over the same time period.

In the absence of the committee reaching an agreement, automatic spending cuts of $1.2 trillion would become effective.

In assigning a negative outlook to the rating, Moody’s indicated, however, that there would be a risk of downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government’s funding costs over and above what is currently expected.

Fitch is now saying essentially the same thing as Moody’s already said: meaningful deficit reduction in 2013, or sayonara to triple-A.  As for the other three risk factors mentioned by Moody’s, the Super Committee failure is surely a sign of weakening fiscal discipline, and if Obama somehow gets re-elected, you’ll never see his silly “deficit hawk” costume again, because it won’t fit over his Lame Duck suit.  The economic outlook is indeed deteriorating significantly, with a new Organization for Economic Cooperation and Development report projecting a slowdown to 2.0% GDP growth or less in 2012.

And as for an “appreciable rise in the US government’s funding costs,” how about the recent discovery of fraud in the ObamaCare cost projections, used to hide the true cost of the “public exchanges?”  A study by the Employment Policies Institute found that “under a broad interpretation of ‘affordable coverage,’ taxpayers will be stuck with as much as $50 billion more in gross subsidy costs than originally projected.”  That’s per year.  Over ten years, that’s an extra $500 billion in spending, and ObamaCare is just getting warmed up. 

Another fraudulent tactic used when selling the bill was front-loading revenue to hide cost.  In the true first ten years of the fully armed and operational ObamaCare, 2014-2024, it will cost over $2.5 trillion, which is far more than the Budget Control Act of 2011 envisioned trimming from the deficit in its wildest dreams.  

It’s going to take a lot of work to avoid the conditions Fitch and Moody’s have set for a full credit rating downgrade in 2013.  It’s painfully obvious that the current President and his Party can’t do it, and will actively oppose vital GDP growth and deficit reduction measures, such as the repeal of ObamaCare.  How anyone could look at the probable future and paint a happy face on Fitch’s negative outlook announcement is baffling.