Fitch Says "Boo" to U.S. Sovereign Debt

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What's happening in the headlines can affect you as an investor. Here's what's going on, what you need to know, and what you should do.

The cold, hard facts
Reuters is reporting that Fitch, one of the big three credit rating agencies, is threatening to downgrade U.S. sovereign debt from AAA, citing the recent failure of the congressional super-committee to agree on at least $1.2 trillion in deficit-reduction measures. Fitch had already lowered the country's outlook from "stable" to "negative."

Some context
"The high and rising federal and general government debt burden is not consistent with the U.S. retaining its 'AAA' status despite its other fundamental sovereign credit strengths," the ratings agency said.

In a new fiscal projection, Fitch said at least $3.5 trillion of additional deficit reduction measures will be required to stabilize the federal debt held by the public at around 90% of gross domestic product in the latter half of the current decade. Fitch added that there would be no decision to cut the current rating, however, until 2013.

What's next
On Aug. 5, Standard & Poor's downgraded U.S. sovereign debt from AAA to AA+ in a historic move that followed hard on the heels of the summer's theater-of-the-absurd debt-ceiling debate. Yet despite predictions of apocalyptic consequences, nothing happened. In fact, post-downgrade, investors rushed into U.S. Treasuries looking for a safe haven, driving yields down to record lows. Go figure.

Actually, the reason is pretty simple. No matter what the ratings agencies say or do, investors around the globe know that the United States is still the safest place to put their money. While the markets have been up and down all year, the Dow Jones (INDEX: ^DJI) , the S&P 500 (INDEX: ^GSPC) , and the Nasdaq (INDEX: ^IXIC) are all operating at or near prerecession levels.

And with a (tentative) U.S. economic recovery in motion, the long term is looking up, which is what we Fools focus on. So while we certainly have to address our mounting deficit, don't lose too much sleep over the Fitch action. Besides, we have until 2013 to fix our debt problems. That's plenty of time, right?

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At the time this article was published Fool contributorJohn Grgurichloves the news so much he wants to marry it, but he owns no shares of anything mentioned above.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a scintillatingdisclosure policy.

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