Fitch agency preserves AAA rating on US bonds
Wall Street ratings agency Fitch kept its AAA mark for US Treasury bonds Tuesday but reiterated its negative outlook amid uncertainty about how Washington would tackle looming austerity and a long-term budget crunch, DPA reported.
The negative outlook meant Fitch would continue to watch how Congress and the White House handle fiscal policy.
By late 2012 or early 2013, the US government would run up against its legal borrowing limits, which could force a damaging shutdown and even a technical debt default unless the deficit cap is raised.
After a showdown between the two major political parties in Congress during the last deficit cap vote in August 2011, Congress implemented a law imposing automatic, severe cuts to both domestic programmes and military spending at the end of 2012. Economists have warned that the austerity measures are so severe that it could stunt already meagre US growth.
At the same time, reductions in income tax rates are due to expire at the end of the year. A sudden tax increase could deal a further blow to the economy.
President Barack Obama has proposed an extension of the lower rates for households earning less than 250,000 dollars a year, arguing that revenue from the highest earners is needed to reduce the government's 1-trillion-dollar deficit. Opposition Republicans, who control the lower House of Representatives, have countered that any tax increase would hurt the already weak economy.
The looming "fiscal cliff," as the combination of issues has been termed in Washington, comes amid the uncertainty of presidential and congressional elections on November 6.
The Fitch statement said the fiscal uncertainty, coupled with the potential spillover of the eurozone debt crisis on the US economy, required the US bond-rating outlook to stay negative as it has been since November.
Another major Wall Street ratings agency, Standard & Poor's, made an unprecedented downgrade of the US bond rating one notch in August - from AAA to AA-plus - after the Treasury nearly ran out of money before a last-minute agreement to raise the debt ceiling.
Despite that action, US bond yields have actually declined since then as uncertainty in Europe and other economies drive investors to the perceived safe harbour of US Treasuries.