By Peter Schroeder - 07/18/11 03:14 PM EDT
The Fitch credit rating agency has warned that it could downgrade the nation's credit rating from AAA to B-plus as soon as Aug. 4 if a deal is not struck to raise the debt limit.
FitchRatings said it still expects Congress and the administration to strike a deal to boost the $14.3 trillion debt limit before the Treasury Department's Aug. 2 deadline, but fleshed out what would happen to the nation's top credit rating if a deal fell through.
First, the rating would be placed on Credit Watch Negative — a move already adopted by fellow rater Standard & Poor's. Two days after the deadline, the Treasury has a $90 billion bond due to mature. If the government does not pay in full that bond, Fitch would immediately knock the rating down several notches to B-plus — the highest possible rating for a nation in default.
Such a move would significantly drive up interest rates for the government, which in turn would boost borrowing costs for all sorts of loans that use Treasury debt as a benchmark for their own rates.
Fitch's report singles out housing giants Fannie Mae and Freddie Mac as particularly vulnerable to a U.S. downgrade, given their current position in government conservatorship. The two government-sponsored enterprises might be able to navigate a U.S. downgrade, but would likely need additional support from the Treasury to avoid being put into receivership.
Fitch said it does not plan to place U.S. banks on Credit Watch Negative if the debt limit is not raised, since they are largely self-funded and not dependent on the government. However, the ensuing negative market reaction from a default could weigh on those banks.
By issuing this report, Fitch joins fellow raters S&P and Moody's Investors Services in issuing fresh warnings on the debt limit. The two other agencies cautioned last week that they were prepping to downgrade the nation's rating if a major deal to raise the debt limit and tackle the deficit is not reached.