UPDATE 2-Fitch scales back chance of U.S. rating downgrade
(Adds debt ceiling details, Moody's details)
LONDON, Jan 28 (Reuters) - Rating agency Fitch scaled back the chance it will strip the United States of its AAA status on Monday, saying a recent deal on the country's debt limit removed the near-term risk of a cut.
But the agency said the danger to the U.S. rating is not yet over, with the country still in need of a plan to cut the deficit while sustaining an economic recovery.
Fitch has warned for months that it could cut the United States rating on a repeat of 2011's acrimonious debt ceiling debacle, which saw policymakers take the country to the brink of default before an 11th-hour agreement.
But on Monday the rating agency said there was a positive step in last week's deal allowing the U.S. government to keep borrowing through a previous deadline of mid-May.
"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.
Fitch said it would likely affirm the U.S. rating and take the outlook back to stable from negative should there be "agreement on a credible medium-term deficit reduction plan consistent with sustaining the economic recovery."
DOWNGRADE STILL POSSIBLE
Rival rating firm Standard & Poor's cut the United States to AA-plus from AAA in August 2011 on the political intransigence when lawmakers last raised the country's debt ceiling.
But that move did little to cool investor ardor for Treasuries, which went on to hit record low yields less than a year later as the global economy remained gloomy.
After raising the debt ceiling again threatened to turn a once-routine operation into another round of fractious finger-pointing in Washington this year, Congress reached a deal earlier this month to sidestep the issue - for now.
The bill passed by the U.S. House of Representatives avoids an immediate threat of U.S. default by suspending limits on the government's ability to borrow until May 19.
It does not specify a dollar amount for any debt ceiling increase, but allows borrowing as needed to meet federal obligations that must be paid by that date.
Nevertheless, the U.S. rating isn't in the clear just yet. Moody's Investors Service, which also rates the country triple-A, has a negative outlook on the rating. That agency said it is particularly looking for improvement in the country's debt-to-GDP ratio and the trajectory of the debt.
Fitch itself 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. (for Fitch statement click
(Reporting by Marc Jones; Additional reporting by Luciana Lopez in New York)