Fitch Ratings warns of credit downgrade if 'fiscal cliff' ensues
"The economic policy challenge facing the president is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the U.S.," said Fitch, one of the three major credit rating companies.
The expiration of the George W. Bush-era tax cuts and the start of automatic spending cuts to reduce the deficit - a combination known as the fiscal cliff - will take place Jan. 1. Most economists believe it would trigger another recession.
In addition, the government will hit its $16.4 trillion debt limit near the end of the year. Treasury officials said they can take steps to allow continued borrowing, but the nation would face a possible default early in 2013 if the limit isn't increased.
Obama and members of Congress have pledged to try to agree on a broad deficit-reduction plan to avoid the impact of the fiscal cliff, and such a deal most likely would include an increase in the debt limit.
But Tuesday's election sent mixed messages from the electorate. Obama was re-elected on a platform of higher taxes for wealthy Americans. Republicans retained the majority in the House, running on a pledge of no tax increases.
Fitch said failure to come to a bipartisan agreement endangered the nation's credit rating. After the bitter fight over raising the debt limit in the summer of 2011, Standard & Poor's downgraded the U.S. rating to AA+ from AAA.
Fitch and Moody's Investor Services did not follow suit.
But Moody's warned in September that failure to reach a deficit-reduction deal probably would lead it to downgrade the U.S. rating.
And Fitch echoed that Wednesday.
"Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilize federal debt over the medium term, consistent with the U.S. retaining its 'AAA' status," Fitch said.
"Conversely, failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch," the company said.