Fitch Issues Credit Warning As Government Shutdown Continues & Default Possibility Looms

US_Federal_Government_Shut_Down_2013CHICAGO, Ill. – Fitch Ratings, one of the three largest debt-rating companies in the world, put U.S. Treasury bonds on Rating Watch Negative, which could be a step toward cutting the government’s AAA debt rating.

The move is a response to the threat of default caused by the deadlock in Congress over the U.S. debt ceiling. If lawmakers don’t reach an agreement to increase the nation’s borrowing authority before the end of the day, the government would have limited ability to make payments on the $16.7 trillion national debt and other operating expenses, such as Social Security and payments to government contractors.

The U.S. Senate is believed to be working on a deal to end the partial government shutdown and raise the debt ceiling, giving lawmakers more time to reach a long-term spending plan. Tea Party Republicans prevented the House from voting on a similar proposal last night.

“The prolonged negotiations over raising the debt ceiling … 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.,” Fitch said in a statement. “This `faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other AAA” bonds.”

“The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy,” the Treasury Department responded.

A study released this week by Bard College suggests that rapid cuts to government spending forced by the need to immediately balance the budget would cause unemployment to surge over the 9.5 percent mark and cause the U.S. economy to shrink by nearly 3 percent.

Moody’s has not indicated plans to change its Aaa rating on U.S. government debt, but S&P already lowered its U.S. credit rating from AAA to AA+ in 2011 in response to a previous debt ceiling crisis.

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