Fix fiscal cliff or risk downgrade, says Fitch

LONDON (CNNMoney)

Fitch said it was expecting a compromise to be reached to avoid $600 billion in tax rises and spending cuts taking effect on January 1, which could tip the U.S. into recession.

"If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating action," the agency said in a bi-annual report.

Standard & Poor's cut its U.S. rating to AA+ in 2011, citing political brinkmanship that was preventing agreement on raising the debt ceiling -- without which the government can't pay its bills -- and a longer term plan to reduce borrowing. It warned earlier this year that a further downgrade was possible in the absence of a debt deal.

Fitch and Moody's have both kept their top AAA ratings in place since then, albeit with negative outlooks. Moody's said in September that it was likely to downgrade the United States if lawmakers were unable to agree a long-term debt reduction plan.

Fitch said it still anticipates a fiscal tightening of 1.5% in the U.S. economy in 2013, but this falls well short of the 5% implied by the fiscal cliff.

Uncertainty over the fiscal cliff and the eurozone crisis were continuing to damage global sovereign credit quality, Fitch added, warning European policymakers against becoming complacent following a recent period of market calm.

"Notwithstanding some progress on banking union at last week's EU summit, significant challenges still confront policy-makers, both in terms of moving towards greater fiscal and financial risk sharing and in breaking the negative feedback loop between sovereigns and their banking systems," it said.

First Published: December 19, 2012: 6:41 AM ET

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