The United States probably wouldn't be able to maintain its prized AAA sovereign ratings status if it suffered even a technical default on its debt, Fitch Ratings said on Wednesday.
Members of the Republican party have been flirting with the notion that a brief U.S. default might be an acceptable price to pay if it forces the White House to deal with runaway spending in their negotiations over raising the national debt ceiling.
In a statement, Fitch warned it would downgrade the U.S. sovereign ratings to restricted default in August if the government fails to honor payments on Treasury securities due on August 15.
Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective and though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the U.S. government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term, Fitch said in its statement.
Fitch added, however, that it believes U.S. lawmakers will ultimately reach an agreement to raise the country's debt ceiling and avoid any default.
In Washington, the Treasury Department said on Wednesday the Fitch warning was another stark reminder of the need for Congress to act quickly to raise the debt limit on how much the country can borrow.
Obama is trying to win congressional approval to raise the borrowing authority before an August 2 deadline.
Treasury Secretary Timothy Geithner has warned the United States could face a catastrophic default that would roil global markets if Congress does not raise the debt ceiling by then.
Moody's credit rating agency warned last Thursday that it could consider cutting the United States' top-notch credit rating if there was not progress by mid-July on a deal to reduce the deficit and raise the $14.3 trillion U.S. debt limit.
Failure to raise the debt ceiling in a timely manner would imply a crisis of governance that could imperil the US 'AAA' status, Fitch said in its statement, quoting David Riley, head of sovereign ratings at Fitch.
More importantly, default by the world's largest borrower and issuer of the preeminent reserve currency would be extraordinary and threaten the still fragile financial stability in the US and the world as a whole, especially against the backdrop of the European sovereign debt crisis.
(Reporting by Walter Brandimarte, Daniel Bases and Burton Frierson; Editing by Kenneth Barry)