The Unites States could see it sovereign triple-A rating downgraded next year if it fails to address its upcoming fiscal problems and reduce the $1 trillion deficit, Fitch, Moody’s and the S&P, the three US major rating agencies warn.
As the US is going to reach the federal debt limit of $16.39 trillion by the end of 2012, experts are concerned the authorities haven’t provided a sustainable strategy to reduce borrowing.
"The rating is in the hands of policymakers," said John Chambers, Chairman of Standard & Poor's, the agency that was first to downgrade the US in August 2011.
The agencies said they will closely watch debt ceiling talks next year, as the raising of the debt limit is likely to result in a downgrade.
The so-called ‘fiscal cliff’ looming in early 2013 is another major threat for the US financial stability and therefore its rating. The ‘fiscal cliff’ of conjoined tax raises and spending cuts, which come into force in January, is expected to result in a 5% GDP tightening and a probable slow down of the economy.
"If no budget deal is reached in the early part of next year and the debt trajectory just continues to rise … then we'd be looking at a downgrade of a notch to Aa1," Bart Oosterveld, Managing Director at Moody's agency told Reuters.
Should that happen, it would drive the country’s cost of borrowing higher and negatively affect investment attractiveness of the United States, experts say.
The Fitch rating agency warns that even if the President and the Congress reach a deal on the ‘fiscal cliff’ it won’t be enough to provide stability. Temporary measures such as pushing back the deadline of fiscal policies to be applied could earn the country a downgrade, according to David Riley, Managing Director at Fitch.
"We're going to find out over the coming months if that (a compromise) will be the case or not," Riley said. "There isn't that much time."
The Congress should agree on fiscal problems by the end of the year. Experts say the $205 billion tax hikes could be avoided if Republicans agree in the next few weeks to continue the low rates introduced by George W.Bush on those earning less than $250,000 a year. However, the policy makers could simply negotiate until the new Congress takes office in January, leaving global markets in uncertainty.