Fitch warns downgrade of US credit is likely if debt ceiling isn’t raised

Failure to raise the debt ceiling ahead of the possible mid-February deadline would likely lead to another downgrade of America’s credit rating, Fitch Ratings warned Tuesday.

Fitch said failure to raise the debt ceiling in a “timely manner” would prompt a formal review of U.S. sovereign ratings, with a downgrade to the nation’s AAA rating likely even if Treasury cuts back federal spending to ensure that the nation’s debt payments can be made.

“It is not assured that the Treasury would or legally could prioritize debt service over its myriad of other obligations, including Social Security payments, tax rebates and payments to contractors and employees,” Fitch said, if the borrowing limit is reached.

“Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met.”

Standard & Poor’s downgraded the nation’s AAA credit rating after the last debt-ceiling fight in 2011 and, like Fitch and Moody’s, holds a negative view on the U.S. debt outlook. 

{mosads}But an agreement to raise the debt ceiling might not ensure that the nation’s credit rating remains untouched. The raters are also concerned about the country’s long-term fiscal situation, and are pushing Washington to enact a sweeping deficit-reduction plan.

“In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current Negative Outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted,” Fitch said.

President Obama said Monday that he doesn’t plan to negotiate with Republicans who want an equal amount of spending cuts in exchange for a debt-ceiling increase, though he said he remains open to more deficit reduction. 

The United States reached the debt limit of nearly $16.4 trillion at the end of last year, and Treasury Secretary Timothy Geithner told Congress on Monday that a default could happen as early as mid-February. 

Geithner said he taking extraordinary measures to clear up another $200 billion for payments but will run out of options next month.

In response, Fitch said the nation’s “economic dynamism and potential, diminishing financial sector risks, respect for the rule of law and property rights, as well as the exceptional financing flexibility” are being “eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt.”

“In Fitch’s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline,” the group said.