Washington (AFP) – Rating agency Fitch on Tuesday put the United States on warning for a downgrade after Congress failed to reach a deal on raising the country’s debt ceiling.
Fitch placed the United States’s top-grade AAA rating on a “negative watch”, citing the possibility the Treasury could default on its obligations after October 17 if the ceiling is not raised.
“The U.S. authorities have not raised the federal debt ceiling in a timely manner,” Fitch said.
“Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”
The Fitch move came after a day of politicking in Congress revealed Republicans and Democrats remained far apart over a deal to fund the government and increase the $16.7 trillion debt ceiling.
U.S. Treasury Secretary Jacob Lew has repeatedly warned that as of October 17 the government will not have any more room to borrow under the ceiling to cover the federal deficit, and that the Treasury’s cash level will be a small $30 billion.
After that, the risk steadily rises that the Treasury will default on its obligations, including possibly its debt.
“The Treasury may be unable to prioritize debt service, and it is unclear whether it even has the legal authority to do so,” noted Fitch.
Even if it can, the U.S. government would risk missing payments to suppliers and employees, as well as social security payments to citizens, “all of which would damage the perception of U.S. sovereign creditworthiness and the economy,” the agency said.
In addition, it said, “the prolonged negotiations over raising the debt ceiling… risks undermining confidence in the role of the US dollar as the preeminent global reserve currency.”
Fitch said that if the U.S. was forced into default, it would reduce the U.S. sovereign credit grade to “restricted default” based on the belief that Washington would quickly move to make good on the debt.
But it would cut the rating on the specific debt affected by missed payments to B+ from AAA, the highest rating it could give defaulted securities, in expectation that the default would be “cured”.
Still, Fitch said that if and when the political gridlock is overcome and the ceiling is raised, allowing the Treasury to balance its finances, it would review the rating based on how the problem was solved “and the perceived risk of a similar episode occurring in the future.”
The proposals in Congress Tuesday left open the prospect for a new crisis in January and February.
A Treasury spokesperson said in reaction: “The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy.”
AFP Photo/Mladen Antonov