As the United States lurches closer to the debt ceiling deadline, Fitch Ratings, one of three major ratings agencies, has placed the United States credit rating on a Rating Watch Negative. Ratings are placed on rating watch to notify investors that there is a reasonable probability of a ratings change. According to Fitch, the federal credit was placed on negative watch because “political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.” Some of the other reasons include:
- The United States Treasury Department may have a limited capacity to make payments after October 17th, but the inflows and outflows will be volatile. Delays in payments of obligations would damage U.S. creditworthiness and the economy.
- The prolonged negotiations are undermining confidence in the role of the U.S. dollar as the global reserve currency.
- The repeated brinkmanship over raising the debt ceiling damages confidence in the U.S. government and political institutions.
Asked about the possibility of a first time U.S. default, Senator Coons told reporters Tuesday, “We are coming bracingly close to the edge. I think we’re looking over it now. We’re in very dangerous territory.”
During the last debate over paying our bills in July 2011, another ratings agency, Standard and Poor’s (S&P) issued a Negative Credit Watch. Following a protracted debate which extended into August 2011, S&P announced a downgrade from AAA to AA+, where our credit rating stands today.
According to S&P in 2011, “The political brinkmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.” In response to S&P downgrading the United States’ creditworthiness, the S&P 500 dropped 6.7 percent in a single day, marking one of the largest drops in history. Globally, investors lost $1.35 trillion in one day.
United States Treasury Secretary Jack Lew has said that the government will exhaust its ability to reliably pay our obligations on October 17th. If the debt ceiling is not raised, nonpartisan analysts expect the U.S. Treasury to run out of cash to pay our bills sometime in the two weeks following October 17th.
“I’m stunned,” Senator Coons said. “I think this is really reckless. There is no better option for us going forward than to reopen the government, pay our national debt on time, raise the debt ceiling, and honor our obligations as a country.”