Fitch Ratings is splitting with Moody’s Investors Service on the significance of when lawmakers agree on extending the U.S. debt ceiling when it comes to the nation’s credit ratings.
The timeliness of government actions will determine how it resolves a negative outlook on its top AAA rating, Fitch said in a statement today. The Feb. 7 deadline is unlikely to affect its Aaa credit grade, Moody’s said, with the U.S. expected to increase the $16.7 trillion debt limit.
“We don’t expect the U.S. obviously to not pay its obligations,” Ed Parker, managing director at Fitch in London, said today in a phone interview. “Even so, in our view, putting into doubt the full faith and credit of the U.S. is something that does or can have a detrimental effect on the U.S. economy, confidence in investing in U.S. Treasuries and the U.S. dollar.”
The debt ceiling was suspended through Feb. 7 under an agreement between President Barack Obama and congressional Republicans in October. Treasury Secretary Jacob J. Lew on Feb. 3 said the U.S. risks breaching the federal debt limit by the end of this month and called on Congress to raise it immediately to sustain economic momentum.
“The more significant date is really when those extraordinary measures run out and the Treasury then has exhausted its borrowing capacity,” Fitch’s Parker said. “We then run into the danger of the Treasury not being able to meet all of its payment obligations.”
The debt limit “is not a significant threat to the ability of the U.S. government to service its debt obligations,” Moody’s said. “While the prospect of the debt limit not being raised on a timely basis can have a significant impact on financial markets, this impact would be temporary and the economic effects limited.”
The Treasury will give interest payments high priority, even if the debt ceiling isn’t raised in a timely fashion, Moody’s said. If debt ceiling negotiations drag and the Treasury has to reduce expenditures the cuts in spending will not be as severe as they would have been in the borrowing limit standoffs of 2011 and 2013, Moody’s said.
Moody’s assigns the U.S. its top credit rating with a stable outlook.
Fitch said the Treasury’s use of extraordinary measures is more uncertain than during the last debt ceiling crisis as the federal government typically runs large deficits in February and March when it issues larger tax refunds, straining its ability to spend.
“Repeatedly casting uncertainty over the full faith and credit of the U.S. risks undermining confidence in the role of the U.S. dollar, having a detrimental effect on the economy, and is not a characteristic typical of a ’AAA’ sovereign,” Fitch said. The company’s scheduled review of its U.S. rating on March 21, which “could be brought forward to reflect developments and events.”
Standard & Poor’s changed its outlook last year to “stable” from “negative.”
S&P stripped the U.S. of its top credit ranking on Aug. 5, 2011, on Washington gridlock and the lack of an agreement to contain its growing ratio of debt to gross domestic product. While the downgrade didn’t immediately result in investors charging the U.S. more to borrow, as 10-year yields slipped to a record 1.38 percent in July 2012, the move contributed to a global stock-market rout that erased about $6 trillion in value from July 26 to Aug. 12, 2011.
The U.S.’s ratio of public debt to GDP is forecast to fall to 74.6 percent in 2015 after peaking next year at 76.2 percent, according to a Congressional Budget Office forecast in May.
The Treasury said yesterday it will suspend sales of its state- and local-government series of non-marketable securities, the first of extraordinary steps it can take to keep funding the government without breaching the nation’s debt limit. Suspension will start at noon New York time on Feb. 7.
The Senate’s third-ranking Republican last week predicted that his party may provide enough votes to raise the limit in February without conditions, such as defunding Obamacare, that members sought in the past.
A dispute over raising the debt limit was among the issues that led to the 16-day partial government shutdown in October. House Republicans tried repeatedly to attach policy provisions curbing Obamacare and promoting the Keystone XL pipeline in exchange for raising the debt cap and funding the government. The debt limit was suspended with no conditions, through bipartisan votes in the Republican-led House and Democratic-controlled Senate.
In October, yields on Treasury surged almost half a percentage point from negative levels the month earlier as money-market mutual funds shunned debt at risk of being effected by a government default.