Fitch Ratings warned on Tuesday it could cut the sovereign credit rating of the US from “AAA,” citing the political brinkmanship over raising the federal debt ceiling.
“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 US default,” it said in a statement.
The firm put its opinion about the creditworthiness of US government debt on what its calls “ratings watch negative,” a reflection of the increasing risk of a near-term default if the debt limit is not raised in time. It gave itself until the end of the first quarter next year to decide whether it will actually cut the rating.
Still, Fitch reaffirmed its belief that an agreement to raise the debt ceiling will be reached, allowing the US government to pay its bills by borrowing beyond the US$16.7 trillion limit currently in place.
Fitch is the only one of the three major credit rating agencies to have a negative outlook on the US sovereign credit. Standard & Poor downgraded the rating to “AA+” with a stable outlook during the last debt ceiling impasse, in August 2011.
“It seems like what we saw from S&P just before the downgrade, they were essentially warning us that the debt ceiling standoff will not be tolerated and this is not in line with a country that maintains an ‘AAA’ credit rating. It’s citing these artificial default risks as the main reason ... They are essentially saying get this done now,” said Gennadiy Goldberg, interest-rate strategist for TD Securities in New York.
Fitch reiterated that the delay in increasing the borrowing capacity of the US raises questions about Washington’s ability to honor its obligations.
Moody’s Investors Service rates US government debt at “Aaa” with a stable outlook.
The US Department of the Treasury has said that the government will reach its borrowing limit on or about today, thereby putting at risk its ability to pay its bills.
Fitch is operating under the assumption that even if the debt limit is not raised before or shortly after today, there will be sufficient political will and capacity to ensure the US will honor its debts.
A US Treasury spokesman said Fitch’s decision is a reminder for lawmakers that the US is dangerously close to defaulting on its obligations.
Negotiations between US President Barack Obama and congressional leaders cycled through a stop-start process again on Tuesday, but no agreement was reached to reopen the government and raise the debt ceiling.
US Treasury prices, already weak ahead of Fitch’s announcement, held their losses on the day.
“The United States has the absolute capacity to pay its debt. This action is not about ability to pay. It is about governance and willingness to pay. In that category the United States has reached the brink of political failure,” said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida.