Europe News

Fitch CEO: US Downgrade Not Likely Before Election

Reported by Carolin Schober, Written by Antonia Oprita|

Ratings agency Fitch is not likely to downgrade the credit ratings of the U.S. before the November elections but the world’s biggest economy definitely needs to tackle its debt problem, Paul Taylor, president and chief executive officer of Fitch Group, told CNBC on Friday.

Residents turn out to vote in mid-term elections at a polling place inside a luxury car dealer in Beverly Hills, California.
Mark Ralston | AFP | Getty Images

In November last year, Fitch revised the outlook for the U.S. triple-A rating to negative from stable, citing lack of consensus on reducing what it called "the outsized federal budget deficit."

"We currently have the U.S. on a negative outlook, which actually suggests we think there is the potential for a downgrade," Taylor said in an interview.

"It's too early to tell whether that will turn into an actual downgrade or not,” he said. “We think we still need to see what's going to happen through the elections and what actions are put in place subsequent to the elections. I think it's very clear that the U.S. does need to do something to deal with the debt problems built up since the financial crisis," he added.

In August last year, S&P downgraded the U.S. from AAA to AA+ on concerns about the country's growing budget deficit.

Fitch warned in November of last year that by postponing difficult decisions on taxes and spending until after the elections, "the scale and pace of required deficit reduction will consequently be greater."

Taylor said the stimulus packages introduced by the U.S.Federal Reserve had a significant effect on growth in the U.S., but from now on the economy has to rely on the private sector.

"Growth will come from companies restarting the engines, it'll come from companies reinvesting again. We don't think it's sustainable to just continue on with stimulus packages, it has to come down to the real economy eventually," he said.

Analysts have said the euro zone's debt crisis has weighed on economic growth in the U.S.  Taylor said the outcome of the crisis is still uncertain.

"Our base case is that we think that the system will still muddle through. We don't expect to see a break-up of the euro zone," he said.

If Greece – which has taken two bailouts from the European Union and the International Monetary Fund and has implemented painful austerity measures in exchange for the cash – ends up leaving the euro zone, the consequences would not be catastrophic, according to Taylor.

"We think the path Greece is on is unsustainable. We do think Greece can exit the euro zone without actually destabilizing the rest of the zone, so we don't think it's anything like a Lehman situation," he said.

Criticism of austerity and the use of spending cuts in order to reduce debt has increased in Europe as elections, notably the runoff of presidential elections in France this coming Sunday, have drawn near.

"It's important to differentiate between some of the political rhetoric you see at election time versus the actual actions that are put into place subsequently to someone being appointed," Taylor said. "In France, in particular, I think the room for maneuver is limited."

—In a previous version, there was an error in a quote by Fitch's Paul Taylor. The correct quote is: "Our base case is that we think that the system will still muddle through. We don't expect to see a break-up of the euro zone."