NEW YORK (Reuters) - Standard & Poor’s on Thursday said it sees an increasing chance that the U.S. economy will go over the so-called fiscal cliff next year, though policymakers will probably compromise in time to avoid that outcome.
Analysts at the credit rating agency now see about a 15 percent chance that political brinkmanship will push the world’s largest economy over the fiscal cliff.
“The most likely scenario, in our view, is that policymakers reach sufficient political compromise in time to avoid most, if not all, potential economic effects of the cliff,” S&P analysts wrote.
The automatic spending cuts coupled with significant tax increases in January could take an estimated $600 billion out of the U.S. economy and push it into recession, according to the non-partisan Congressional Budget Office’s assessment of the fiscal cliff.
After the re-election of President Barack Obama and the return of a Republican majority in the House of Representatives, markets have fretted that policymakers will not reach an agreement in time to avert most of the cliff’s economic consequences. Stock indexes have slid as investors flocked to safe-haven U.S. Treasuries.
Last year S&P cut the U.S. rating from the top level of AAA to AA-plus, citing the acrimonious fight in Congress over raising the country’s debt ceiling.
The United States has fared better with Moody’s Investors Service and Fitch, which have held their ratings at Aaa and AAA, respectively.
But the outlook for all three ratings is negative, which means the country could see more downgrades in the medium term.
MOODY‘S, FITCH WARN
Moody’s Investors Service on Wednesday said it will wait until the 2013 budget process is completed until it decides whether to cut its sovereign credit rating for the United States.
But the agency’s analysts have repeatedly warned that they must see progress on resolving the country’s debt trajectory next year.
“What a budget deal might look like and what mix of revenue raising and expenditure cutting is used, we’re frankly indifferent,” said Bart Oosterveld, managing director at Moody’s sovereign risk group.
“What will drive us to act on the rating is the path of the federal debt trajectory in relation to GDP.”
Earlier this week, Fitch also said failure to avoid the fiscal cliff and raise the debt ceiling “would likely result in a rating downgrade in 2013.”
Even if the United States avoids the fiscal cliff, Fitch could still cut the rating if the measures used are temporary and do not include a medium-term solution, London-based David Riley, a managing director at Fitch, told Reuters on Wednesday.
But a credible budget plan could boost the economy, Riley said.
“When you’re looking at the U.S. from this side of the Atlantic, you say the outlook looks quite good compared to the UK and the rest of Europe. If you can resolve this gridlock in Congress and provide some clarity, there’s probably upside to the U.S. economy,” Riley said. (Additional reporting by Daniel Bases; Editing by David Gregorio)