MNI: U.S. Fiscal Trajectory Deviating From AAA peers-Fitch

U.S. fiscal policy has become so muddied by political infighting that it is becoming inconsistent with that of a ‘AAA’ credit, Fitch Ratings told MNI in an email a day after putting the United States on watch for a possible downgrade.

“The U.S. fiscal trajectory continues to deviate from those of ‘AAA’ rated peers, and the fiscal governance framework appears overridden by political considerations, unable to deliver an effective consolidation strategy,” Fitch said.

The U.S. dollar’s role as a reserve currency gives the country unusual wiggle room – but even that has its limits.

“The dollar alone cannot support the ‘AAA’ sovereign credit profile if accompanied by a continued erosion of the country’s fiscal finances,” Fitch said.

The U.S. is fast approaching the June 1 ‘X-dated flagged by Treasury Secretary Janet Yellen as marking the moment when the country will no longer be able to fully meet its obligations.

Fitch said it still expects a deal to be reached in time but warned that the possibility of a downgrade remains “given the very short time remaining for a political agreement to be reached and executed prior to the X-date.”

The absence of an agreement would lead to the U.S. being assigned a rating of ‘Restricted Default’ immediately, Fitch said.

“Other outcomes after the X-date are possible, including the prioritization of debt service over other spending obligations, and Fitch might determine such arrangements to be incompatible with ‘AAA’.