Fitch Ratings warns US over budget fighting

With the government two days away from enacting the harsh "sequester" budget cuts because political parties cannot agree a more moderate compromise, Fitch said that the policy deadlock could lower confidence in the world's largest economy.

It pointed out that after the $85 billion sequester cuts that begin to take effect Friday comes a battle over a six-month budget, which has to be concluded by March 31 or the government could be shut down.

And shortly after that, on May 19, the country will hit its statutory borrowing limit.

"Implementation of the automatic spending cuts -- the sequester -- and a government shutdown would not prompt a negative rating action," Fitch said in a statement.

"But such an outcome would further erode confidence that timely agreement will be reached on additional deficit-reduction measures necessary to secure the 'AAA' rating."

Fitch, like other rating agencies focused mainly on how the US will reduce its massive deficit and debt burdens over the medium term, said that the sequester itself was not bad.

It called the 2011 poison-pill deal between Democrats and Republicans, originally aimed at scaring them into a more moderate deficit-cutting plan, the government's "only substantive agreement on medium-term deficit reduction" so far.

But it acknowledged projections that implementing the sequester's $85 billion in targeted cuts over the next seven months, and $110 billion in reductions for the 2014 fiscal year, would slow economic growth.

"A re-profiling of the spending cuts would support the economic recovery," Fitch said.

"But eliminating the sequester without putting in place equivalent deficit-reduction measures would imply higher deficits and debt than currently projected by Fitch and increase the pressure on the US sovereign ratings."

Washington has already lost its top-grade AAA rating from Standard & Poor's due to the long-running budget battles.

S&P downgraded the United States by one notch in August 2011 citing the country's unsustainable debt profile and the political deadlock which has prevented the government from implementing a medium-term plan to close the deficit.

At that time -- and reiterated last December -- S&P cited "the political brinkmanship of recent months (that) highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable."

The other large ratings agency, Moody's, has maintained its AAA grade, but has repeatedly warned about Washington's poorly functioning budgeting process.

"Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government's Aaa rating and negative outlook," Moody's said last September.