October 16, 2013 in Nation/World

Fitch puts U.S. credit rating on negative watch

Christopher S. Rugaber Associated Press
 

WASHINGTON – The Fitch credit rating agency has warned that it is reviewing the U.S. government’s AAA credit rating for a possible downgrade, citing the impasse in Washington that has raised the threat of a default on the nation’s debt.

Fitch placed the U.S. credit rating on negative watch Tuesday, a step that would precede an actual downgrade. The agency said it expects to conclude its review within six months.

The announcement comes as House and Senate leaders face a Thursday deadline to raise the nation’s $16.7 trillion borrowing limit. Fitch says it expects the debt limit to be raised soon. But it adds, “the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”

A Treasury Department spokesman said Fitch’s announcement “reflects the urgency with which Congress should act to remove the threat of default hanging over the economy.”

Dow Jones industrial futures were essentially unchanged Tuesday evening. Fitch made its announcement after financial markets had closed.

Lawmakers spent most of Tuesday trying to reach an agreement to lift the government’s borrowing limit and avoid an eventual default. The limit is a cap on how much debt the government can accumulate to pay its bills. The government borrows in most years because its spending has long exceeded its revenue.

Fitch is one of the three leading U.S. credit rating agencies, along with Standard & Poor’s and Moody’s Investors Service.

S&P downgraded U.S. long-term debt to “AA+” in August 2011. But three months ago, it raised its outlook. That was in part because of tax increases and spending cuts that have helped shrink the budget deficit. S&P has said it’s unlikely to change its rating because of the debt-limit fight.

Moody’s said last week that even if Congress failed to raise the limit by Thursday, Treasury could make its interest payments ahead of other bills, “leaving its creditworthiness intact.”

Fitch took a dimmer view Tuesday. It said Treasury might not be able to prioritize its interest payments. “It is unclear whether it even has the legal authority to do so,” Fitch said.

A credit rating is an assessment of how able a country or company is to repay the money it’s borrowed. A rating of AAA lets companies and governments borrow at super-low rates.

So far, most investors have remained confident in U.S. debt, though rates have risen on short-term Treasury bills and shot up Tuesday as Congress’ deadline neared. In a rare move, Fidelity Investments and JP Morgan Chase said last week that they had purged their money market funds of all U.S. bills that come due soon after this week.

Still, rates have remained stable on longer-term debt, like the benchmark 10-year Treasury note. That shows that investors remain confident in longer-term Treasurys. The rate on the 10-year note is important because it affects rates on mortgages and many other loans.

Jack Ablin, chief investment officer at BMO Private Bank, said Fitch’s warning was no surprise.

“Creditworthiness is a function of two thing: ability and willingness,” Ablin said. “No one is questioning our ability. But there is uncertainty about our willingness to pay.”

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