Fitch scales back chance of U.S. rating downgrade

A bank employee counts U.S. hundred dollar bills at Kasikornbank in Bangkok January 21, 2010.

LONDON (Reuters) - Rating agency Fitch scaled back the chances of it stripping the United States of its AAA status on Monday, saying the recent agreement on the temporary suspension of the country's debt limit removed the near-term risk of a cut.

Earlier this month Fitch said their was a "material risk" of a U.S. sovereign downgrade if there was a repeat of the 2011 debt ceiling spat.

But on Monday the rating agency said last week's deal allowing the U.S. government to keep borrowing through a previous deadline of mid-May was a positive step.

"Without the distraction of a near-term funding crisis for the federal government, Congress and the Administration have the space to focus on the substantive fiscal policy choices necessary to place public finances on a sustainable path over the medium to long-term," Fitch said.

"Agreement on a credible medium-term deficit reduction plan consistent with sustaining the economic recovery would likely result in the affirmation of the U.S. 'AAA' rating and revision of the rating Outlook to Stable from Negative."

Rival rating firm Standard & Poor's has already downgraded the world's biggest economy, lowering it a notch to AA-plus in August 2011 - a move which appears to have done little to dull the attraction of U.S. bonds for investors. Like Fitch, Moody's has it in the top rating bracket but with a downgrade warning.

Despite the more upbeat tone, Fitch said a downgrade was still likely later in the year if Washington failed to use the new breathing space to put in place a credible debt reduction plan.

"In the absence of additional structural measures to narrow the gap between federal outlays and receipts, federal government debt will continue to drift higher and public debt, including that owed by state and local governments will reach around 115% percent of GDP by the end of the decade," it said.

(Reporting by Marc Jones; Editing by Hugh Lawson)