WASHINGTON (AP) - Fitch Ratings says it might downgrade U.S. debt if lawmakers fail to increase the nation's borrowing limit before the government runs out of money in August.
The rating agency, based in New York, said Wednesday that it will put the debt on watch for a possible downgrade if lawmakers have not reached a deal by Aug. 2. That's the date by which the Treasury Department will have exhausted stopgap measures it is using to delay a default.
Fitch expects the debt ceiling to be increased. If that doesn't happen, the nation might default, implying "a crisis of governance" and threatening the stability of the world financial system, the rating agency said.
"Default by the world's largest borrower and issuer of the pre-eminent reserve currency would be extraordinary and threaten the still fragile financial stability in the U.S. and the world as a whole, especially against the backdrop of the European sovereign debt crisis," said David Riley, head of Sovereign Ratings at Fitch, in a statement.
A lower credit rating could spread through the economy, increasing the cost of borrowing for consumers and businesses That's because many loans, including mortgages, tend to follow yields on U.S. Treasury bonds. If investors demand higher yields to offset the increased risk associated with Treasury debt, rates for other loans would rise, as well.
If borrowing and spending decrease sharply, the sluggish economic recovery could run out of steam.
The government reached its borrowing limit of $14.29 billion on May 16. Since then, Treasury Secretary Timothy Geithner has employed what he calls "extraordinary measures" to continue paying the government's bills. They include borrowing from two federal employee pension funds and halting a program under which Treasury issues securities to help state and local governments meet their investment obligations.
President Barack Obama and congressional Republicans agree that the nation must reduce its annual deficit. They disagree about how to do it. Republicans want to solve the problem with spending cuts, while Democrats insist that tax increases also must be part of the plan.
Failing to increase the borrowing limit could upend the financial system and imperil the economic recovery, the administration has warned. Business groups and Wall Street firms agree. But some Republicans believe that a default would not have long-term reverberations. They refuse to support a higher debt ceiling unless Democrats agree to billions in spending cuts.
If Congress and the Obama administration fail to reach a deal before Treasury runs out of time, Fitch will place U.S. debt on "Rating Watch Negative." Major banks and other companies closely linked to government debt also would be reviewed, Fitch said.
If Treasury can't repay $52 billion of Treasury notes and coupon payments due on Aug. 15, the nation's sovereign debt rating would be deemed in "Restricted Default" until the government has made good on its debts, Fitch said. At that point, Fitch would increase the sovereign rating to "a level commensurate with Fitch's assessment of the creditworthiness of the U.S. government," the rating agency said.
It is not the first such warning. Moody's Investors Service said last week that it might begin reviewing the nation's credit rating next month.
In April, Standard & Poor's lowered its long-term outlook for the government's fiscal health to "negative" from "stable." S&P warned that it could strip the government of its top credit rating over the next two years if lawmakers failed to rein in the deficit.