If the U.S. fails to raise its debt ceiling to avoid defaulting on loans, ratings agency Fitch warned on June 8 that it risks losing its top credit rating. The third of the three big ratings houses to issue such a warning, Fitch said the country needed to beat the August 2 deadline for upping its $14.29 trillion borrowing ceiling to avoid seeing its bonds lose their top-grade AAA rating.
It said that slashing spending to eliminate the need to borrow more was no real alternative to a hike in the borrowing ceiling.
"With an annual budget deficit equivalent to around 10%t of gross domestic product, balancing the budget is not a credible alternative to raising the debt ceiling in the near term if a sovereign default is to be avoided," Fitch said.
"Such an event would be without precedent by the issuer of the global reserve currency and would pose a systemic threat to U..S and global financial stability."
Fitch gave the U.S. a temporary out, saying that if the battling political parties cannot come to an agreement on raising the ceiling by August 2, its likely action would be to sharply lower its rating specifically on a $30 billion Treasury bill due for repayment on August 4.
Even if the U.S. failed to repay the bond on that day, Fitch said it would not declare the U.S. government in default, assuming that the government would eventually redeem the debt in full when a deal on the ceiling is reached.
"Fitch would not necessarily place the U.S. sovereign rating into default if it judged at the time that the non-payment would be cured in full (including the payment of accrued interest) before the next Treasury bill matures on August 11," it said.
"Fitch would only recognize a sovereign default event if there was failure to honor on due date interest and/or principal payments due on U.S. Treasury securities."
However, it added, "even a 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective. "And though such an event (as a short-lived Treasury bill default) might not permanently impair the capacity of the US government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term."
In recent weeks, ratings giants Standard & Poor's and Moody's had already warned that the U.S. credit rating faced unprecedented repercussions if politicians could not come to a pact on hiking the debt cap.
Copyright Agence France-Presse, 2011
S&P Sees 'Negative' Outlook for U.S. Debt