Fitch Ratings agency just made good on its promise to reevaluate the United States’ credit rating if American politicians didn’t get their act together. Today, it officially put the US on “rating watch negative,” warning that it will slash the country’s prized AAA rating if politicians don’t raise the debt ceiling in time to avoid a technical default on the US’s liabilities.
“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,” Fitch analysts wrote in a press release. “This ‘faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.” Standard & Poor’s cut the US credit rating by one notch back in August 2011, the last time the country was plagued by a debt ceiling debate, and has not restored it to AAA.
Fitch says it still expects politicians will come to a deal that will allow the federal government to raise the debt ceiling and avoid a default. Fitch said it would figure out whether or not to go ahead with a ratings cut by the end of the first quarter of 2014, barring extraordinary events. However, it’s unequivocal about what happens if there’s no deal by this Thursday (Oct. 17): “Failure by the government to honour interest and/or principal payments on the due date of U.S. Treasury securities would lead Fitch to downgrade the U.S. sovereign IDR to ‘Restricted Default’ (RD) until the default event was cured.”