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After averting default, U.S. retains only shaky grip on AAA debt rating

The United State averted a debt default Tuesday when President Obama signed a bill raising the country's debt ceiling. But the debt deal might not be enough to maintain its coveted AAA debt rating, according to two credit rating agencies.

Fitch Ratings said the agreement to raise the debt ceiling and make spending cuts was an important first step but "not the end of the process." The rating agency said it wants to see a credible plan to reduce the budget deficit "to a level that would secure the United States' 'AAA' status."

Later Tuesday, Moody's Investors Service assigned a negative outlook to U.S. debt but confirmed its AAA rating -- for now. A negative outlook means the rating agency could lower the rating in the next 12 to 18 months.

Moody's said continued slow economic growth and higher interest rates could lead to a downgrade. It also said weak fiscal discipline in the coming year could do the same.

U.S. debt has held the AAA rating since 1917. Fewer than 20 countries are currently rated AAA. Among them: Great Britain, Australia, Germany and Singapore.

Fitch expects to conclude its review of the U.S. debt rating by the end of the month. Given the terms of the debt deal signed Tuesday, the debt rating could be downgraded at that time, Fitch said.

"There's more to be done in order to keep the rating in the medium-term," David Riley, managing director at Fitch, said Tuesday in an interview with the Associated Press.

The three main rating agencies evaluate the debt issued by countries, states, corporations and municipalities. Ratings are based on a likelihood of default. The AAA rating is the highest available and signifies an extremely low likelihood of default.

Standard & Poor's, the other major rating agency, declined to comment Tuesday. In mid-July, S&P had warned of a 50-50 chance it would downgrade U.S. debt. Had the country defaulted, experts have said a downgrade by all three agencies would have been likely.

The United States has faced the threat of a downgrade only once in the last 96 years. In 1995, when Bill Clinton was president, a similar default loomed, and the credit-rating agencies threatened a downgrade. At the time, the country had $4.9 trillion in debt -- nearly $10 trillion less than it has now. Once Congress resolved that debt crisis a year later, the credit agencies removed the threat.

Joe Balestrino, Federated Investors' chief fixed-income strategist, noted that during the Clinton era the U.S. economy was growing at a much faster pace. Now, the economy is emerging from the deepest recession since the Great Depression, and growth is sluggish. The government said Friday that in the first half of the year, the economy grew at its slowest pace since the recession officially ended in June 2009.

"Growth healed all wounds in 1995," Balestrino said. "However, now the U.S. doesn't have enough vitality to grow its way out."

A Monday report that showed weakness in manufacturing followed Friday's GDP report. The Commerce Department said Tuesday that consumers cut their spending in June for the first time in nearly two years.

Because of that, many analysts believe that U.S. debt eventually will be downgraded to AA. If that happens, regaining the AAA rating could be tough.

"If the economy won't grow at 2.5 percent over the long term, it has pretty profound implications from a fiscal point of view," said Riley, the Fitch managing director.

"That means the U.S. is poorer than it thought" and that legislators will face even tougher choices "in terms of taxes and spending," he said.