US debt limit extension staves off immediate threat of downgrade

28 Jan 13
Plans to temporarily extend the US government debt limit have removed the ‘near-term’ risk of the country losing its triple-A credit rating, Fitch said today.

By Nick Mann | 28 January 2013

Plans to temporarily extend the US government debt limit have removed the ‘near-term’ risk of the country losing its triple-A credit rating, Fitch said today.

The Republican-dominated House of Representatives voted last week in favour of suspending the limit, known as the debt ceiling, for three months until May 19. The US formally reached its borrowing limit at the end of last year, but the Treasury has been using a series of ‘extraordinary measures’ to enable it to keep paying the government’s bills. These were expected to run out by the end of February at the latest.

According to Fitch, the extension gives Congress and the US President Barack Obama the space to focus on the ‘substantive’ fiscal policy choices needed to put the US public finances on a ‘sustainable path’ in the medium to long-term. The Democrat-dominated Senate is expected to back the suspension of the limit this week, before it is sent for Obama to approve.

Agreeing a ‘credible’ medium-term deficit reduction plan that sustains the US economic recovery is likely to result in the US’s triple-A rating being re-affirmed and the outlook on the rating being changed from ‘negative’ to ‘stable’, Fitch said.

It warned, however, that without this plan, the US would be likely to face a downgrade later this year.

According to the ratings agency, without additional measures to narrow the gap between federal government spending and revenues, government debt – including state and local governments’ finances – will reach around 115% of gross domestic product by 2020.

‘Such a level of indebtedness would erode the fiscal space necessary to absorb future negative economic or financial “shocks” and limit the scope for counter-cyclical fiscal policies and hence would be inconsistent with the federal government and Treasury securities retaining their “AAA” status,’ Fitch said.

Passing a 2014 budget through Congress, alongside an increase in the debt limit, would strengthen confidence in the US government’s finances and also help to lay the foundations for a longer-term deficit reduction plan, it added.

The agency noted that ‘timely agreement’ was also needed to address the automatic spending cuts that were originally due to take effect on January 1 but are now set to be implemented on March 1.

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