By Judith Ugwumadu | 7 January 2014
The US Congress must reach an agreement to increase the country’s debt limit by tomorrow to avoid the possibility of a credit ratings downgrade, Fitch has warned.
The credit rating agency said today that resolving the debt restrictions would be a ‘key driver’ in taking the country off its current negative ratings watch.
A short-term deal lifting the borrowing restrictions was reached last October, but this expires today.
In a research note, Fitch stated a deal needed to be reached by tomorrow. ‘Timely resolution of the debt limit is necessary to avoid immediate uncertainties about the Treasury’s ability to remain current on its obligations, including payments on Treasury securities.’
The agency assigned the Rating Watch Negative to the ‘AAA’ US sovereign on October 15.
However, the agency said that it expected ‘the debt ceiling [to] be raised (or suspended) before the Treasury exhausts its borrowing capacity’.
If the debt ceiling is not raised or suspended again from February 8 then the Treasury would have to resort to extraordinary measures to access new funding, the rating agency said. US Treasury Secretary Jack Lew said in a letter to Congress on January 22 that the Treasury is likely to exhaust its extraordinary measures in late February. However, outside groups including the Bipartisan Policy Centre and the Congressional Budget Office have different projections of when the Treasury could exhaust its extraordinary measures, ranging from between late March to as long as June.
Fitch said that the timeframe for using extraordinary measures was ‘uncertain’. ‘These would buy only limited time before the Treasury runs out of new borrowing capacity (though it can continue to roll-over maturing debt).
‘As we have said previously, repeatedly casting uncertainty over the full faith and credit of the US risks undermining confidence in the role of the US dollar, having a detrimental effect on the economy, and is not a characteristic typical of a 'AAA' sovereign,’ Fitch said.
The next scheduled review of the US rating is March 21, although the review could be brought forward, Fitch warned. It would consider the timeliness of an agreement to raise the debt limit, the projected time before which the new limit would become obligatory and the risk of a similar episode re-occurring in the near term in its review.
Earlier this week, Lew urged Congress to increase the country’s borrowing limit in a timely manner. He warned Congress that if the debt ceiling isn’t raised by then the Treasury could exhaust its borrowing capacity risking a possible default on federal debt payments.
