KEY RATING DRIVERS
In line with Fitch's previous statements, the RWN reflects the following key rating drivers and their relative weights:
- The U.S. authorities have not raised the federal debt ceiling in a timely manner before the Treasury exhausts extraordinary measures. The U.S. Treasury Secretary has said that extraordinary measures will be exhausted by 17 October, leaving cash reserves of just USD30bn. 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.
- Although the Treasury would still have limited capacity to make payments after 17 October it would be exposed to volatile revenue and expenditure flows. The Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so. 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.
- The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) 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. This "faith" is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns.
The RWN reflects the following risk factors that may individually or collectively result in a downgrade of the ratings:
- Failure by the government to honour interest and/or principal payments on the due date of U.S. Treasury securities would lead Fitch to downgrade the U.S. sovereign IDR to 'Restricted Default' (RD) until the default event was cured. We would also downgrade the rating of the affected issue(s) to 'B+' from 'AAA', the highest rating for securities in default in expectation of full or near-full recovery. Debt securities approaching maturity or those with approaching coupon payments would be vulnerable to a downgrade. The Country Ceiling would likely remain 'AAA'.
In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement and the perceived risk of a similar episode occurring in the future. It would also reflect Fitch's assessment of the following main factors:
- The impact of the debt ceiling brinkmanship and government shutdown on our assessment of the effectiveness of government and political institutions, the coherence and credibility of economic policy, the potential long-term impact on the U.S. sovereign's cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.
- Our assessment of the prospects for further deficit-reduction measures in future years necessary to contain government deficits in the face of long-term spending pressures and place public debt on a downward path over the medium to long term.
Fitch continues to believe that an agreement will be reached to end the current political impasse and raise the U.S. debt ceiling. Even if the debt limit is not raised before or shortly after 17 October, we assume there is sufficient political will and capacity to ensure that Treasury securities will continue to be honoured in full and on time.
By the way, look how much we cut the deficit since 2010. How has fiscal tightening not affected economic growth?
- The 'AAA' rating also reflects the halving of the federal budget deficit since 2010, which is now approaching a level consistent with debt stabilisation. The Budget Control Act passed in August 2011 implied significant fiscal consolidation and Congress and the Administration have adhered to the automatic spending cuts - the sequester - specified under the Act in the absence of agreement on an alternative and equivalent set of deficit-reduction measures. In addition, the passage of the American Taxpayer Relief Act on 1 January 2013, which implied a tax increase of more than USD600bn, has also contributed to the deficit reduction effort.
Read the full release at FitchRatings.com.