Fitch affirms U.S. AAA rating but outlook still negative

By Daniel Bases

NEW YORK (Reuters) - Fitch Ratings on Friday affirmed the United States' top level credit rating at AAA but held the outlook at negative, saying still-elevated debt levels leave the country vulnerable to shocks without more deficit reduction.

The affirmation reflects strong economic and credit fundamentals, the firm said in a statement. In addition, Fitch cited the decline in the federal budget deficit to levels "consistent with debt stabilization."

U.S. market reaction was muted by the late hour of the announcement. Benchmark 10-year U.S. Treasury yields briefly dipped immediately after the news but quickly returned to their prior level of 2.48 percent.

Fitch said it will conduct a further review of the credit rating by the end of 2013, although it technically now has until June of next year to do so under its existing guidelines.

"The outlook remains negative due to continuing uncertainty over the prospect for additional deficit-reduction measures necessary ... over the medium to long term," Fitch said.

Fitch also said the negative outlook reflects "near-term risks associated with the expiration of federal appropriations authority at the end of the current fiscal year" September 30.

Fitch highlighted the diversity of the U.S. economy, its "extraordinary monetary and exchange rate flexibility," global reserve currency status of the U.S. dollar as well as the depth and liquidity of its financial markets as underpinnings for the top credit rating.

"Fitch's current assessment is that the economic recovery is gaining traction as the headwinds from private sector debt deleveraging ease. This is underpinned by a pick-up in the housing market and gradual decline in unemployment," the firm said.

In August, 2011, rival ratings agency Standard & Poor's cut the U.S. credit rating to AA-plus from AAA. On June 10, S&P revised its outlook on the credit to stable from negative, removing the near-term threat of a downgrade because of an improving economic and fiscal outlook.

Moody's Investors Service holds the U.S. rating at Aaa with a negative outlook, a position it has held since August 2011.

FISCAL IMPROVEMENT

On May 14, the non-partisan Congressional Budget Office said the U.S. federal budget deficit is shrinking faster than expected, and forecast this fiscal year would end with the smallest shortfall since 2008.

The CBO slashed the deficit forecast for the current fiscal year by $203 billion from its February estimate of $642 billion,.

Fitch said deficit reduction got a boost from a budget deal struck by Congress on New Year's Day 2013 to head off $600 billion in automatic spending cuts and tax increases.

Fitch expects gross debt level of the federal government to stabilize next year and over the rest of the decade at around 74 percent of gross domestic product. It expects the general government debt, which includes state and local governments, to stabilize at 107 percent of GDP over the same time period.

Both debt levels are below thresholds Fitch had identified as inconsistent with the U.S. retaining its AAA status. The threshold it set for federal debt was 80 percent, with a 110 percent threshold for general government gross debt levels.

In May, the CBO said a U.S. debt limit increase may not be needed until November, easing fears of a summer debt-limit showdown in the U.S. Congress. When S&P made its historic decision to cut the U.S. credit rating two years ago it cited political brinksmanship and gridlock in Washington for delaying an otherwise routine raising of the nation's debt ceiling.

"Fitch assumes that even in the unlikely event that the debt limit is not raised in a timely fashion, there is sufficient political will and capacity to ensure that Treasury securities will continue to be honored in full and on time," the firm cited as one of its key assumptions.

(Reporting by Daniel Bases and Pam Niimi; Editing by James Dalgleish and David Gregorio)

Source: http://news.yahoo.com/fitch-affirms-u-aaa-rating-outlook-still-negative-210608701.html

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