The U.S. government could lose its top credit rating from a second major rating agency if Congress and the White House can’t agree on raising the debt ceiling soon, Fitch Ratings warned Tuesday.
On Dec. 31, the federal government reached the statutory debt limit of $16.39 trillion. The U.S. Treasury has begun implementing measures to create an estimated $200 billion of additional headroom under the existing debt ceiling. Together with about $43 billion in Treasury deposits there is expected to be enough to fund the government until the end of next month, the London-based agency said.
However, “failure to raise the debt ceiling in a timely manner will prompt a formal review,” of the U.S. sovereign credit rating, Fitch said. It cited the 2011 debt ceiling crisis, as a result of which Standard & Poor’s downgraded the nation’s top sovereign credit rating, as the kind of standoff that could lead to a downgrade.
“A repeat of the August 2011 'debt ceiling crisis' would oblige Fitch to review its current assessment of the reliability and predictability of the institutional policy framework and prospects for reaching agreement on a credible medium-term deficit reduction plan,” the agency said.
Even if Washington manages to reach an agreement on raising the debt ceiling, Fitch expressed concern about uncertainty over whether $54 billion of spending cuts (sequester) deferred by two months under the agreement reached just in time to avoid the so-called fiscal cliff on Jan. 1, 2013, will come into effect in fiscal year 2013 and a further $96 billion of reductions in outlays in fiscal year 2014. Further, the agency noted that on March 27, the federal government spending authority expires and, unless renewed, will result in a government shutdown.
“In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current Negative Outlook on the 'AAA' rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted,” Fitch said.