Fitch Ratings has just told the lawmakers and policymakers in Washington D.C. to get their act together. The ratings agency had previously been a supporter of the AAA credit ratings of the United States, but now Fitch has placed the United States’ AAA on Rating Watch Negative. As you would expect, this is due to uncertainties rather than due to the strength of the United States economy as a whole.
Fitch said that the ‘AAA’ Long-term foreign and local currency Issuer Default Ratings of all outstanding U.S. sovereign debt securities have also been placed on Rating Watch Negative. Also included in the outlook are the U.S. Short-term foreign currency rating of ‘F1+’.
One thing that we would remind readers about is that the Fitch Outlook on the Long-term ratings was previously Negative, and the U.S. Country Ceiling has been affirmed at ‘AAA’.
Fitch signaled that it expects to resolve the negative watch by the end of the first quarter of 2014 at the latest. It further said that the timing would necessarily reflect developments and events, including the duration of any agreement to raise the debt ceiling.
The first thing that was pointed out was that the U.S. authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures. Fitch even said that it continues to believe that the debt ceiling will be raised soon, but the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.
A worry is that the Treasury may be unable to prioritize debt service, and it was also pointed out as being unclear whether the Treasury even has the legal authority to prioritize that debt servicing. All of the possible payment delays would damage the perception of U.S. sovereign creditworthiness and the economy.
Here is where you need to be most concerned: risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This “faith” is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.
Anyhow, the rest of the logic you can probably assume or understand. Washington D.C. is broken, and what is shocking is that the ratings agencies have been very slow to opine on this matter in substantial detail without more dire warnings.
The one issue that 24/7 Wall St. would like to remind readers about is that a U.S. credit rating downgrade technically triggers systematic downgrades of any and every entity under the U.S. or operating in the U.S. In short, it is a snowball rolling downhill that grown and grows. This snowball looks like it made of something else and its color is brown.