Delay in Raising Debt Ceiling Would Lead to Rating Review — Fitch

US Treasury buildingCalling into question the intention of the United States to pay its debts would lead to a formal review of U.S. sovereign debt ratings, according to Fitch Ratings. The ratings firm does say that the likelihood that Congress will not raise the debt ceiling "remains extremely low," but adds that failing to raise the debt ceiling in a "timely manner" will kick off a formal review.

Fitch has nothing good to say about the debt ceiling requirement:

[T]he debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.

Noting that the Treasury Department has taken "extraordinary measures" to provide about $200 billion in added authority to the nation's debt limit gives the U.S. government until about the end of February to raise the ceiling that expired on December 31. Fitch says, "It is highly uncertain what would happen if Congress did not raise the debt ceiling before the Treasury's borrowing authority and available cash balances were exhausted."

One possible solution, now that a trillion-dollar coin and an invocation of the 14th Amendment have been taken off the table, is that the Obama administration could prioritize further spending to pay interest on the national debt before paying other obligations already authorized by Congress. Fitch says that "it is not clear that the Treasury would or legally could prioritise debt service over its myriad other obligations."

Fitch concludes:

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.

The press release from Fitch Ratings is available here.


Filed under: 24/7 Wall St. Wire, Economy, Politics

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