Fitch puts U.S. credit rating on downgrade watch over debt fight

WASHINGTON -- Fitch Ratings on Tuesday put the U.S. AAA credit rating on watch for a potential downgrade because of the standoff over raising the nation’s debt limit.

The company said it still believed the debt limit would be raised soon, but the “political brinkmanship” was risking a default.

The Treasury Department has said it would run out of borrowing authority by Thursday if the $16.7-trillion debt limit is not increased. Democrats and Republicans in Congress were working Tuesday to strike a deal to raise the limit before the deadline.

“Although the Treasury would still have limited capacity to make payments after (Thursday) it would be exposed to volatile revenue and expenditure flows,” Fitch said, noting Treasury officials have said they would run out of borrowing authority and be left with $30 billion cash on hand and incoming revenues to pay bills.

“The Treasury may be unable to prioritize debt service, and it is unclear whether it even has the legal authority to do so,” the company said in a report. “The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as Social Security payments to citizens -- all of which would damage the perception of U.S. sovereign creditworthiness and the economy.”

QUIZ: Test your knowledge about the debt limit

Fitch, one of three leading credit rating firms, already had a negative outlook for the U.S. credit rating, meaning a downgrade could take place in three to five years.

After the 2011 debt limit showdown, Standard & Poor’s lowered the U.S. rating to AA+, the first ever downgrade for the federal government. Fitch and Moody’s Investor Services, the other leading credit rating companies, did not follow suit, but put the U.S. on a negative outlook.

In July, Moody’s upgraded the outlook to stable because of the shrinking budget deficit and improving economy. The company warned last month that failure to raise the debt limit could roil financial markets but said at the time a debt limit breach would not lead to a credit rating downgrade.

Fitch said Tuesday that “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.”

The faith by investors in the U.S. is the reason it still has a AAA rating despite its high level of debt, Fitch said.

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