Fitch yesterday said it has placed the United States of America’s ‘AAA’ Long-term foreign and local currency Issuer Default Ratings (IDRs) on Rating Watch Negative (RWN), citing the possibility the Treasury could default on its obligations after October 17 if the ceiling is not raised.
The ratings of all outstanding US sovereign debt securities have also been placed on RWN, as has the US Short-term foreign currency rating of ‘F1+’. The Outlook on the Long-term ratings was previously Negative, it said.
The US Ceiling has been affirmed at ‘AAA’ put US Treasury bonds on Rating Watch Negative, which is sometimes but not always a first step before a downgrade, it said.
Fitch said the US authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures. The US Treasury Secretary has said that extraordinary measures will be exhausted by 17 October, leaving cash reserves of just USD 30 billion.
“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.
Fitch said the Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so.
The US risks being forced to incur widespread delays of payments to suppliers and employees, as well as social security payments to citizens – all of which would damage the perception of US sovereign creditworthiness and the economy, it said.
Although, the Treasury would still have limited capacity to make payments after October 17 it would be exposed to volatile revenue and expenditure flows, it added.
According to the rating agency, the prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risk undermining confidence in the role of the US dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the US.
“This “faith” is a key reason why the US ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns,” it said.