Fitch, S&P Clash on U.S. Rating: Who's Right?


On Tuesday, credit ratings agency Fitch affirmed its "AAA" rating of the U.S. and said its near-term outlook for America's sovereign paper was "stable." The decision is a remarkable contrast to the cut in the U.S. rating by S&P, which downgraded the nation's debt to "AA+" and offered a "negative" near-term view. It would take a crystal ball to say which of the firms is right, but the differences in the reasoning are easy to see.

Fitch said in the explanation of its decision that "The affirmation of the US 'AAA' sovereign rating reflects the fact that the key pillars of U.S.'s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks'''. The agency downplayed concerns about political gridlock in Washington, poor efforts to cut the deficit, and the costs of the U.S. debt, which continues to increase.

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In contrast, S&P's concerns were center on "political risk" and a "rising debt burden." The agency wrote "More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a
negative outlook to the rating on April 18, 2011."

The credibility of two ratings, or lack thereof, pivots on one issue. Does Washington decide economic policy or does the economy force the hands of politicians? If the debt and deficit problems worsen and Social Security and Medicare are threatened, will voters force Congress and the Administration to act before U.S. financial obligations become unsustainable? Put simply, are American citizens smart enough, and active enough, to press their collective opinion on the people they select to run the federal government?