fitch warns on us debt ceiling delay

Fitch Ratings will consider downgrading the US’ AAA credit rating in the next few weeks if the country fails to raise its debt ceiling in a timely manner.

fitch warns on us debt ceiling delay
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The ratings agency also said the world’s largest economy is likely to see its top credit rating slashed later in 2013 – even if policymakers are able to avert another borrowing limit crisis.

The US officially hit its $16.4trn authorised borrowing limit – also known as the debt ceiling – on 31 December 2012, although various “extraordinary measures”, or accounting tricks, will allow the federal government to keep running until the end of February.

However, the country will have to debate lifting its borrowing limit in the coming few weeks if it is to keep funding the government. Past experience has shown policymakers are liable to delay in these negotiations.

Fitch said: “Protracted debate prior to increasing the debt ceiling is not an exceptional event, but against the backdrop of unprecedentedly large peacetime budget deficits and outstanding debt, any delay in raising the limit would pose ever increasing risks to the ability of the federal government to honour its obligations in a timely fashion.”

In August 2011, US policymakers brokered a complex deal to raise the borrowing limit to its current level. The delays in this deal, which was characterised by political brinkmanship, led to Standard & Poor’s stripping the US of its top credit rating.

“A repeat of the August 2011 ‘debt ceiling crisis’ would oblige Fitch to review its current assessment of the reliability and predictability of the institutional policy framework and prospects for reaching agreement on a credible medium-term deficit reduction plan,” a statement by the ratings agency said.

“Failure to raise the debt ceiling in a timely manner will prompt a formal review of the US sovereign ratings.”

Although the agency conceded that the risk of US government default remains “extremely low”, it added that a downgrade of its AAA rating seems likely before the end of 2013 unless policymakers soon agree on a credible deficit reduction plan.

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