Fitch warns it may downgrade U.S. if debt ceiling isn’t raised

Fitch warns it may downgrade U.S. if debt ceiling isn’t raised

Fitch Ratings Ltd. warned on Tuesday that Congress’s failure to raise the federal government’s statutory borrowing limit would “very likely” prompt a downgrading of the United States Government’s credit rating, and the agency seemed to suggest that Congress should simply do away with the debt ceiling altogether.

In a pointed statement, Fitch dismissed the assurances of some Republicans that the Treasury Department would be able to use incoming tax receipts to prioritize the payment of government debt and interest, as well as vital services like military pay and Social Security. That warning echoed the Treasury’s own assessment that breaching the debt ceiling could not be managed in any way that would minimize the economic turmoil or avoid default.

“It is not assured that the Treasury would or legally could prioritize debt service over its myriad of other obligations, including Social Security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met,” Fitch wrote.

Standard & Poor’s, a larger credit rating agency, downgraded United States debt a notch in August 2011 after the last standoff over the federal debt limit, reflecting “our view that the effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned.”

Fitch and Moody’s Investors Service, the other major rating agency, did not follow suit, keeping the rating of United States Treasury debt at AAA. Far from serving as a unifying moment, the S.&P. downgrade divided Washington further. Republicans said the downgrade resulted from President Obama’s refusal to dramatically cut spending to get the federal deficit under control. Democrats said it was a reflection of political paralysis that stemmed from Republican intransigence.

The Fitch warning seemed to hem in Republicans further, however. Mr. Obama has repeatedly said he will not negotiate over the debt ceiling, and on Monday, he compared Republican refusal to raise it to a criminal taking a hostage. Fitch appeared to side with the president.

“In Fitch’s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible,” the agency wrote.

Source: The New York Times