Fitch threatens to downgrade U.S. debt from AAA

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, writes The Motley Fool.

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 stabilise 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 theatre-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, the S&P 500, and the Nasdaq are all operating at or near prerecession levels. We wish the same could be said of our S&P/ASX 200 (INDEXASX:XJO), down 13 per cent in 2011, or the All Ordinaries (INDEXASX:XAO), off 14 per cent.

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 the country certainly has to address its  mounting deficit, don’t lose too much sleep over the Fitch action. Besides, the U.S. have until 2013 to fix their debt problems. That’s plenty of time, right?

Of course, that’s not to say markets won’t continue on their volatile way in 2012. If you’re worried about a sharemarket crash, be sure to request this Motley Fool free report Read This Before The Market Crashes. It may save you thousands of dollars, and endless heartache.

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