By Peter Schroeder - 10/15/13 08:54 PM EDT
The credit rating of the United States is in danger of a downgrade from a second rater, after Fitch Ratings announced policymakers had put the nation at an increased risk of a default.
The rater announced late Tuesday that it was placing the nation's AAA credit rating on negative watch, citing failure to raise the nation's $16.7 trillion debt ceiling in a "timely manner."
"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default," the rater said in a statement.
Even if the U.S. were able to prioritize interest payments on the nation's debt to avoid the most damaging parts of a default, Fitch warned that failure to raise the debt limit would lead to a host of other damaging outcomes that would damage the nation's reputation in markets.
"The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as Social Security payments to citizens — all of which would damage the perception of U.S. sovereign creditworthiness and the economy," Fitch wrote.
Fitch took pains to say that brinksmanship in the political system — and
not the nation's debt-load — was what had sparked the downgrade watch. The
rater noted that the U.S. deficit has fallen since 2010, and said the
federal debt is on course to reach stable levels over the next decade.
A Treasury spokesman said Fitch's move "reflects the urgency in which Congress should act to remove the threat of default hanging over the economy."
A negative watch from a credit rater means the rating in question stands a 50 percent chance of a downgrade in the next three months, but the watch could be removed quickly if circumstances change.
While Fitch said the U.S. still retains a strong and diverse economy, political drama surrounding its ability to pay its bills on time has put its sterling credit rating in danger.
Long-running fiscal fights have undermined confidence in the U.S. dollar as the world's reserve currency and cast doubt over the full faith and credit of the United States, the rater warned.
The Treasury Department has warned that it will be left with just $30 billion in cash after Oct. 17 to pay all its bills, putting the nation at a risk of default in the coming days.
Some Treasury watchers, including fellow rater Moody's Investors Service, have said they expect the Treasury would prioritize interest payments on U.S. debt above all others, limiting the most damaging economic impacts to a default. But Fitch said Tuesday it believed the Treasury might be unable to prioritize payments, and questioned whether such a move was actually legal.
— This story was updated at 6:25 p.m.