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Will Fitch Downgrade the U.S. Over Debt Ceiling Drama?

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When Standard and Poor's downgraded the U.S. AAA rating, on August 5, 2011, the Dow dropped 2000 points and gold soared to $1,895 an ounce. Are we at the brink of another downgrade by Fitch Ratings?

In a press release issued on February 5, 2014, Fitch Ratings criticized the political showdown over the debt ceiling, writing, "Repeatedly casting uncertainty over the full faith and credit of the U.S. risks undermining confidence in the role of the U.S. dollar." While this is not the only consideration in the AAA credit rating, it could be the straw that broke the camel's back.

Should the U.S. Remain AAA Rated?
Below are some of the pluses and minuses that Fitch Ratings will be considering.

Global Reserve Currency.
The U.S. dollar is still the most liquid currency in the world. 61.4 percent of global reserves (allocated) are held in U.S. dollars (source: IMF). However, this is down from 72 percent in 1999. The Canadian and Australian dollars are now being measured. While this is a nascent currency movement, it is growing.

GDP Growth.
The U.S. economy experienced 1.9 percent GDP growth in 2013 (according to the Bureau of Economic Analysis advance estimates). Projections are for three percent GDP growth in 2014, according to the Congressional Budget Office. This will weigh favorably in the mix.

Full faith and credit tarnished by politics.
Standard and Poor's has already downgraded the U.S., largely due to lack of political backbone to come together to reduce spending and debt and balance the budget, while keeping the economy growing. Fitch Ratings has indicated that the continued political circus is "not a characteristic typical of a 'AAA' sovereign."

Double the median debt of other AAA sovereigns.
According to Fitch Ratings, "The U.S. is the most heavily indebted 'AAA' rated sovereign, with a gross debt ratio equivalent to double that of the 'AAA' median."

AAA Sovereigns

Of the 13 sovereigns still rated AAA by Fitch Ratings, over half have less than 65 percent debt to GDP ratios. All of these countries have substantially less debt than the United States of America.


The most indebted AAA countries are:

U.S with $17.3 trillion. This is more than all of the European Union combined.

Germany is the fourth most indebted sovereign with $5.7 trillion, behind the United Kingdom, with $10 trillion. The U.K. was downgraded by Fitch Ratings on April 19, 2013.

Fitch Ratings is scheduled to review the U.S. rating on March 21, 2014 and to act by March 31, 2014. However, Fitch has warned that if the Debt Ceiling is not raised, or if the Treasury doesn't issue tax refunds in a timely manner, the review could occur before this date.