Fitch lowered U.S. soverign long-term outlook rating to Negative

Although ratings agency Fitch lowered its long-term outlook rating for U.S. sovereign debt to Negative from Stable, there's really no surprise there. Basically this was in response to the failure of the joint congressional deficit committee to come to a deficit reduction deal. In other words, because the U.S. still does not have a credible plan for deficit reduction. For the short-term, Fitch did reaffirm the U.S. Treasury security rating of AAA, but Fitch explicitly indicated that a downgrade was slightly more likely than not over the next two years ("The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon.") Fitch says they will update their outlook and ratings in 2012, but does not expect any resolution of the deficit issue until late 2013.

 

Meanwhile, for investors, this is more of a sideshow than an urgent current concern.

 

I would note that the release from Fitch failed to mention to impact of the expiration of the Bush tax cuts at the end of 2012. That really is quite a big deal, so I am baffled why they did not include it. As things stand, unless either party gets overwhelming control of Congress next year (which is unlikely), the cuts will automatically expire and lead to a sharp increase in tax revenue in 2013, for a total estimated impact of $4.7 trillion over ten years, on top of the automatic across the board $1.2 million spending cuts over ten years that start in 2013. Combined, that really does put a substantial dent in the deficit, which is why I say that investors need not worry about this "sideshow."

-- Jack Krupansky