By Peter Schroeder - 12/19/12 02:12 PM EST
The U.S. would be more likely to suffer a second downgrade to its credit rating if policymakers take the nation over the "fiscal cliff," FitchRatings warned Wednesday.
The credit rating agency identified the combination of expiring tax cuts and automatic spending cuts as the "single biggest near-term threat" to the world's economy, which could thrust the U.S. into an "unnecessary and avoidable recession."
"If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013 and appear likely to be prolonged with adverse implications for the economy and financial stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating action," the agency wrote in its biannual report on sovereign debt.
Fitch currently estimates that U.S. will face a fiscal drag of 1.5 percent in the U.S. economy next year, but that is well short of the estimated 5 percent hit the economy would face if it were to go over the cliff.
The credit raters have been pressuring Washington to do something to improve its fiscal position for over a year. Standard & Poor's became the first rater to ever downgrade the nation's rating, knocking it down to AA-plus in August 2011, citing the brinksmanship stemming from the eleventh-hour battle over raising the debt limit.
The remaining two major raters, Fitch and Moody's Investors Service, have maintained the nation's top rating, but have warned that it is in danger if policymakers are unable to improve their fiscal policy. Both raters have the nation's rating on a negative outlook, meaning a downgrade is more likely than not without a change in course.