Fitch puts US debt rating on watch for downgrade

WASHINGTON—Rating agency Fitch on Tuesday put the United States on warning for a downgrade after Congress failed to reach a deal on raising the country’s debt ceiling.

Fitch placed the United States’s top-grade AAA rating on a “negative watch,” citing the possibility the Treasury could default on its obligations after October 17 if the ceiling is not raised.

“The US authorities have not raised the federal debt ceiling in a timely manner,” Fitch said.

“Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a US default.”

The Fitch move came after a day of politicking in Congress revealed Republicans and Democrats remained far apart over a deal to fund the government and increase the $16.7 trillion debt ceiling.

US Treasury Secretary Jacob Lew has repeatedly warned that as of October 17 the government will not have any more room to borrow under the ceiling to cover the federal deficit, and that the Treasury’s cash level will be a small $30 billion.

After that, the risk steadily rises that the Treasury will default on its obligations, including possibly its debt.

“The Treasury may be unable to prioritize debt service, and it is unclear whether it even has the legal authority to do so,” noted Fitch.

Even if it can, the US government would risk missing payments to suppliers and employees, as well as social security payments to citizens, “all of which would damage the perception of US sovereign creditworthiness and the economy,” the agency said.

In addition, it said, “the prolonged negotiations over raising the debt ceiling… risks undermining confidence in the role of the US dollar as the preeminent global reserve currency.”

Fitch said that if the US was forced into default, it would reduce the US sovereign credit grade to “restricted default” based on the belief that Washington would quickly move to make good on the debt.

But it would cut the rating on the specific debt affected by missed payments to B+ from AAA, the highest rating it could give defaulted securities, in expectation that the default would be “cured.”

Still, Fitch said that if and when the political gridlock is overcome and the ceiling is raised, allowing the Treasury to balance its finances, it would review the rating based on how the problem was solved “and the perceived risk of a similar episode occurring in the future.”

The proposals in Congress Tuesday left open the prospect for a new crisis in January and February.

A Treasury spokesperson said in reaction: “The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy.”

source: business.inquirer.net

Dollar sinks in Asia on US debt fears

TOKYO – The dollar fell in Asia Monday as investors fear a US budget deadlock in Washington could continue past a mid-October deadline to raise the country’s borrowing limit and cause a devastating default.

The greenback bought 97.08 yen in Tokyo, against 97.47 yen in New York Friday afternoon.

The euro was at $1.3567 and 131.76 yen, compared with $1.3557 and 132.14 yen.

Traders are buying the safe-haven yen on concerns US lawmakers – whose face-off has forced a government shutdown – will not strike a budget deal before October 17, when the government runs out of cash to pay its bills and could in turn default.

A similar showdown in 2011 saw the borrowing limit raise at the last minute but not before global stock markets tumbled while the crisis caused the downgrade of Washington’s sovereign debt rating.

US Treasury Secretary Jack Lew warned Sunday that Congress was “playing with fire” as Republican House leader John Boehner said the party would not raise the US debt ceiling without spending cuts.

“If anything both sides have become more entrenched in their positions, implying that any agreement on raising the debt ceiling… also looks out of reach,” Credit Agricole said.

“Market reaction so far has been relatively muted in the expectation of an agreement but such hopes may prove optimistic,” it added.

The government shutdown, which is entering its seventh day, has also affected the release of US economic data with no clarity on when key non-farm payrolls data, originally due out last week, will be published.

source: business.inquirer.net