Fitch Puts US Credit Rating On 'Watch Negative'

Fitch Ratings placed the United States’ sovereign debt on “ratings watch negative” Tuesday afternoon as the deadline for default neared without action by Congress to avert it.

The rating remained at AAA, however, thanks to “strong economic and credit fundamentals,” according to the rating agency’s statement.

The first reason for the warning that Fitch cited was: “The U.S. authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures. The U.S. Treasury Secretary has said that extraordinary measures will be exhausted by 17 October, leaving cash reserves of just USD30bn. 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 U.S. default.”

Drawing back for the context of its decision, Fitch stated, “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. 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.”

Echoing the warnings of many economists, Fitch chided Washington politicians, saying, “The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy."

The statement, however, attempted to end on a positive note, declaring: “Fitch continues to believe that an agreement will be reached to end the current political impasse and raise the U.S. debt ceiling. Even if the debt limit is not raised before or shortly after 17 October, we assume there is sufficient political will and capacity to ensure that Treasury securities will continue to be honored in full and on time.”