Fitch lowers U.S. outlook after supercommittee failure

The super committee's failure and other economic uncertainty hasn't much hurt the muni bond market.
Supercommittee failure risks another recession

The failure of the congressional supercommittee to agree on a way to reduce the deficit has led a ratings agency to downgrade its outlook on U.S. debt.

While affirming the top notch AAA rating for long-term treasuries, Fitch Ratings has revised its outlook on U.S. debt to negative.

David Riley, head of Sovereign Ratings at Fitch, said in an interview a negative outlook leads to a downgrade about 60 percent of the time. But he said that decision likely would not happen before late 2013.

"We didn't expect that the committee would be able to resolve the budget problem in one single go," he said. "But we had believed it was possible for the committee to provide a platform for developing a consensus on how to reduce the deficit."

"Tough decisions are going to have to be made" on entitlement spending and taxes, he said. The supercommittee failed to find consensus on both.

As part of the August deal to raise the debt ceiling, the 12-member bipartisan committee was tasked with reducing the deficit by $1.2 trillion. Its failure will result in automatic cuts in domestic and defense starting in 2013.

"The whole emphasis on trying to bring the budget deficit down now is on discretionary spending," he said. "We don't think ultimately that is credible."

Fitch projects 2012 to be a tough year for the U.S. economy, with growth at a modest 1.6 percent and continuing high unemployment. But the agency expects the recovery to gain momentum in 2013 and projected growth will increase to 2.6 percent.

The agency estimates federal debt will exceed 90 percent of GDP by the end of the decade, and if state and local debts are included, total government debt will exceed 110 percent of GDP in that timeframe.

"There clearly is a consensus that the current situation is not sustainable," Riley said.

He said they expect little action on deficit reduction before the elections next fall.

"Elections sometimes are a good way of focusing the mind and highlighting the tough choices that have to be made," Riley said. "We think there is a reasonable chance that the election and the new administration and congress that comes into office will have the mandate to take those tough decisions."