By Richard Johnstone | 16 October 2013
Credit ratings agency Fitch has warned that the United States could be downgraded as a result of the fiscal crisis that has shut the federal government and risks an imminent debt default.
The warning came after Senate talks to end the shutdown and increase the federal debt ceiling were halted so the House of Representatives could propose an agreement.
Amid the negotiations in Washington, Fitch put the US’s triple-A rating on negative watch, the first step towards a downgrade.
It said the principle reason was that the debt ceiling had not been raised ‘in a timely manner’, with government set to hit its borrowing limit tomorrow.
US Treasury Secretary Jack Lew has warned that, without an increase in the borrowing limit, the government will have reserves of just $30bn to meet its commitments, including debt repayments. Once this cash is used up, the government would likely default on its sovereign debt payments.
Although Fitch stated that it ‘continues to believe that the debt ceiling will be raised soon’, it added that ‘the political brinkmanship and reduced financing flexibility’ had increased the risk of a US default.
The prolonged negotiations over raising the borrowing limit, which follow a similar episode in August 2011, have also undermined confidence in the role of the US dollar as the pre-eminent global reserve currency, the agency stated.
The crisis has undermined confidence in the effectiveness of the US government and political institutions, Fitch said, and would have a detrimental effect on the nation’s economy.
Speaking before the announcement by Fitch, Senate majority leader Harry Reid yesterday criticised proposals being discussed by the House of Representatives as ‘a blatant attack on bipartisanship’.
Negotiations between Democrats and Republicans in the Senate had led to hopes a deal would be done well in advance of the debt ceiling limit being reached.
However, as any bill to do so would also need agreement in the House, these talks were halted to allow the lower chamber to devise proposals.
Reid said last night that ‘extremist Republicans in the House of Representatives are attempting to torpedo the Senate’s bipartisan progress with a bill that cannot pass the Senate’.
The House bill includes some changes to President Barack Obama’s healthcare reforms that would not be backed by senators, he said.
‘For the past several days, we have been engaged in productive, bipartisan negotiations here in the Senate. We have been working across party lines, and making steady progress to achieve an agreement that reopens the government, protects the full faith and credit of the United States and opens talks to put this country on firm fiscal footing.
‘Everyone needs to know that the measure under discussion in the House is no part of what we’ve negotiated here in the Senate.
‘We have worked hard to rise above partisanship and find common ground in the Senate for the good of the nation. I am disappointed that Republicans in the House are trying to sabotage that success.’
Talks on the possible Senate deal are expected to resume today, which Republican leader Mitch McConnell said would take place in ‘good faith’.
