By Peter Schroeder - 06/08/11 03:50 PM EDT
The United States would endanger its coveted AAA credit rating if Congress allows even a short-term "technical default" to occur, according to the Fitch credit rating agency.
Fitch said Wednesday it would put the nation's credit rating on "ratings watch negative" if a deal to raise the $14.3 trillion debt limit is not reached by August.
A true default happens when a country literally has no ability to pay its debt payments.
The agency's take comes after some have suggested that a short-term default might not be damaging to the country.
Fitch's comments now mean all three of the major credit ratings agencies have weighed in on the debt-limit debate.
The Treasury Department responded to the report by pressing lawmakers to strike a deal to raise the limit promptly.
"Today's report is another stark reminder of the need to act decisively and expeditiously to remove uncertainty in the market by raising the debt limit so the U.S. can meet its obligations," said Mary Miller, the Treasury's assistant secretary for financial markets.
Fitch maintained that a default would be "without precedent" and "would pose a systemic threat to U.S. and global financial stability."
If the Treasury missed a payment on its debts, even for a short period, Fitch would lower the nation's credit rating — adding that it would be "unlikely" the government could return to AAA after such a default.
Several conservative Republicans have argued that the government can avoid a default by not raising the debt limit and simply prioritizing payments on debt service if the limit is reached. Sen. Pat Toomey (R-Pa.) has even pushed legislation directing the Treasury to do so, arguing it removes the looming threat of default from negotiations to raise the limit.
Fitch said that if the government was forced to prioritize debt service payments and had to forgo payments to other suppliers, it could damage its rating. While shirking such payments would not automatically lower its rating, it would "damage perceptions of U.S. sovereign creditworthiness and signal growing financial distress." As a result, the agency would put the nation's credit rating on negative watch.
Despite the warnings, Fitch emphasized that it still believes Congress will reach a deal to raise the debt limit in time and that a default would be "extremely unlikely."
Earlier this month, Moody's Investors Services warned the nation's credit rating could be put on negative watch if a deal does not appear to be forthcoming in the next few weeks, warning that heightened political gamesmanship increased the risk of a short default.
However, they also warned that a "credible agreement" to reduce the deficit must be reached as part of an agreement to hike the debt limit if the nation wants to protect its credit rating. Republicans, including House Speaker John Boehner (R-Ohio) pointed to Moody's take as proof that major deficit reduction needs to accompany any debt-limit increase.
In April, Standard & Poor's lowered its outlook on U.S. debt from "stable" to "negative," citing growing pessimism about lawmakers' ability to strike a deal.