Why Fitch Ratings Placed U.S. Credit Rating on ‘Rating Watch Negative’

Fitch Ratings placed the ‘AAA’ U.S. credit rating on negative watch late Tuesday following intense back-and-forth negotiations between policymakers. Republicans and Democrats are still in disagreement about how to raise the nation’s borrowing limit before Thursday’s deadline.

The mainstream media has already begun to place the blame on Republicans and the failure to increase the debt ceiling, but that is not accurate, at all. In a statement, the ratings company said the ratings of all outstanding U.S. debt securities are also on negative watch.

“Fitch expects to resolve the (ratings watch negative) by the end of the (first quarter of 2014) at the latest, although timing would necessarily reflect developments and events, including the duration of any agreement to raise the debt ceiling,” the ratings service said in its statement Tuesday.

Fitch said the decision to put the U.S. credit rating on negative watch was driven by a number of key factors, including in part but not limited to the inability of Congress to come to an agreement on how to deal with the debt ceiling. Fitch Ratings also named Congress’ inability to stop the runaway spending and mounting debt in a “timely manner” before the U.S. Treasury Department exhausts its extraordinary measures by October 17.

“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,” Fitch said.

The Treasury Department said in a statement that the decision by Fitch, “reflects the urgency with which Congress should act to remove the threat of default hanging over the economy.” But the Treasury Secretary under the direction of President Obama wants to ignore the second, and more important, reason for Fitch Ratings making the decision they did.

The ratings service noted though Treasury could use its cash reserves to make payments after Thursday, but it would be “exposed to volatile revenue and expenditure flows.” Further, it said it’s unclear whether the department could even have the legal authority to prioritize debt payments and the risk of delayed payments would damage the U.S. economic reputation and creditworthiness.

In laymen, if the U.S. national debt wasn’t so large, then the failure to raise the debt ceiling would not be a big economic deal. But because interest rates during volatility will increase the cost of servicing the debt, the size of the debt is such that it will be unserviceable.

Fitch said it still believes the U.S. to be “more dynamic and resilient to shocks than its high-grade rating peers,” and affirms the credit rate at a platinum ‘AAA.’ Further, it forecasts the economy will grow 1.6% this year and 2.6% in 2014.

“Nevertheless, public debt stabilization at such elevated levels still render the US economy and public finances vulnerable to adverse shocks and in the absence of additional spending reform and revenue measures, deficits and debt will begin to rise again at the end of the decade,” Fitch said in a statement.