WASHINGTON — Fitch Ratings said it will consider putting the United States on a negative rating watch if the debt ceiling is not increased by Oct. 17, when the U.S. Treasury is expected to exhaust extraordinary measures and will be forced to rely on cash on hand and incoming revenues.
Fitch currently gives the United States an triple-A rating with a negative outlook. If placed on a negative rating watch, there is a higher likelihood of a downgrade within a shorter time frame.
The U. S. reached the $16.7 trillion debt limit in May, but is expected to use up its extraordinary measures to finance government spending on Oct. 17, at which time its cash balance will be only $30 billion.
If the extraordinary measures are exhausted, the federal government will only be able to meet its obligations using cash on hand and incoming revenues. Fitch said the federal government would have a limited ability to make payments and would be “exposed to volatile revenue and expenditure flows.”
Fitch would only recognize a sovereign default if the federal government did not pay interest and/or principal on Treasuries on time, it said. If that happened, the issuer rating for the U.S. would be lowered to “restricted default” until the default was fixed.
Once the default was resolved, the U.S. issuer rating “would be raised to a level reflecting our assessment of the creditworthiness of the U.S. sovereign,” Fitch said. “This would reflect the scale and duration of the default, the perceived risk of a similar episode occurring in the future, the likely impact on the U.S. sovereign’s cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.”
If the U.S. defaulted, it’s unlikely that Fitch would return its rating to triple-A in the short-to-medium run once the default was cured.
“Even a short-lived default, that did not impair the long-term capacity of the U.S. government to service its obligations, would call into question the effectiveness of the country’s political institutions in ensuring that sovereign debt obligations are honored in a timely manner,” the rating agency said.
Under a default, Treasuries that were specifically affected would be lowered from triple-A to B+ (the highest rating Fitch gives for bonds in default when a full or near-full recovery is expected), the rating agency said. Treasuries approaching maturity could also be downgraded, it said. Entities whose ratings are underpinned by U.S. sovereign support could see negative rating consequences.
States’ and localities’ ratings would not be directly affected. However, some municipal obligations with direct links to the U.S. rating would be, including bonds secured by the federal government and U.S. guaranteed debt obligations. Those bonds would be placed on a negative rating watch that would not be adjusted until the U. S.’ default were resolved.
Standard & Poor’s said recently that if the U. S. failed to make a debt service payment, it would lower the country’s rating to “selective default” until the situation is cured. The rating agency noted that post-default sovereign ratings tend to be between CCC+ and B, but the defaults of other countries did not occur because of political brinkmanship among branches of government. A default could also result in lowered ratings for obligations that depend on payments from the U.S. government.
Moody’s Investors Service said that it believes the federal government will prioritize debt payments and avoid defaulting on interest payments for Treasuries if the debt limit is not raised.