Fitch Ratings on Tuesday afternoon warned that it may downgrade the U.S. credit rating from triple-A as a result of the congressional impasse that is forcing the Treasury to hit its borrowing limit on Thursday and could lead to a first-ever default on Treasury securities within days after that.
While both the House and the Senate are drafting bills that would extend borrowing authority through February, Democrats and Republicans in both houses remain at loggerheads over what other provisions to attach to the measure, with the House GOP continuing to hold out for major alterations in President Obama’s signature health reform program.
Fitch noted that with such big outstanding difference, not enough time remains to ensure the Treasury will be able to continue paying the nation’s debts.
“The U.S. authorities have not raised the federal debt ceiling in a timely manner,” said Fitch managing director Ed Parker. “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.”
Fitch took little comfort in the fact that Treasury on Thursday will still have some $30 billion in cash on hand and will still be getting some additional tax revenues each day, noting that the revenue and spending flows can be “volatile” from day to day and it is “unclear” whether the Treasury has the legal authority needed to put debt payments ahead of other government obligations such as Social Security, veterans and Medicare payments.
Even if the Treasury withholds payment from some citizens so it can make debt payments, doing so “would damage the perception of U.S. sovereign creditworthiness and the economy,” while diminishing the U.S. status and prestige in global financial markets, Mr. Parker said.
“The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S.”
In putting the U.S. rating under review for a downgrade, Fitch cited many of the same issues raised by Standard & Poor’s Corp. when it downgraded the U.S.for the first time to AA-plus in August 2011.
“The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy,” Mr. Parker said.
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