Members of Congress have been warned…again. Fitch Ratings just put the U.S. government on “negative” watch.
That’s not as terrible as a downgrade, which Standard & Poor’s slapped the government with after the last debt ceiling showdown in 2011. But it’s a sign of how desperate the circumstances are and an indication that a downgrade could soon occur. Of course, the United States might already have been plunged toward recession by the time that downgrade would happen.
The ratings agency said it doesn’t expect the situation to become quite that dire, but it nonetheless cautioned about the possible repercussions of the ongoing standoff. “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 U.S. default,” the agency said in a statement.
The gridlock on Capitol Hill has already led to a partial shutdown, and unless the $16.7 trillion debt ceiling is raised by Thursday the shockwaves of a government default would cause havoc across the entire global economy. “The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as Social Security payments to citizens – all of which would damage the perception of U.S. sovereign creditworthiness and the economy,” Fitch warned.
Its statement is as serious an official scolding as lawmakers will get without actual damage from the government starting to miss payments. It was released less than an hour after the U.S. stock markets closed nearly 1 percent lower for the day, shaken by a lack of progress in Washington.
The rating agency’s notice might be enough of a wake-up call to force some kind of compromise.
Senate Majority Leader Harry Reid (D-NV) paused his negotiations with his GOP counterpart, Sen. Mitch McConnell of Kentucky, after House Speaker John Boehner (R-OH) announced on Tuesday that his members had yet another plan of their own to temporarily reopen the government and raise the debt ceiling. But Boehner still tied these increases through early next year to changes in Obamacare and provides no vehicle to negotiate a larger budget deal.
“Ratings agencies are talking about downgrading us as early as tonight,” Reid said on the Senate floor. “I know I speak for many of us who’ve been working in good faith when I say that we felt blindsided by the news from the House.”
The message from Fitch was clear and obvious—that the showdown is casting doubts on the government’s AAA rating.
“Democrats and Republicans are now equally guilty of bringing this nation to this awful place,” said David Kotok, chairman of Cumberland Advisors, in a client note. “They are playing with fire when they injure the creditworthiness of the country.… Default is the unthinkable event and the risk is now perceived to be above zero. Fitch is doing the correct thing by placing the US on credit watch for a downgrade.”