Fitch's Warning on U.S. Credit Rating Downgrade

Fitch Ratings agency said today (Tuesday) that if policymakers on Capitol Hill drag their heels in raising the country's debt ceiling, Fitch could issue a U.S. credit rating downgrade.

David Riley, managing director of the leading credit ratings firm said Tuesday that he is concerned about an impending credit crisis and cautioned that failure to raise the debt ceiling by March 1 will activate a formal review of the nation's coveted AAA rating.

"The pressure on the U.S. rating, if anything, is increasing," Riley said during a conference in London. "We thought the 2011 crisis was a one-off event... if we have a repeat we will place the U.S. rating under review."

Fitch presently maintains a "negative" outlook on the United States, and plans to decide this year if a downgrade is warranted.

Why U.S. Credit Rating Downgrade Looks Likely

After the United States hit its $16.4 trillion debt ceiling on Dec. 31, the Treasury provided emergency funds to keep the U.S. government running, but those funds are quickly running out.

With the clock ticking, the country is facing a serious risk of default as early as mid-February.

It is short-term fixes like the emergency funding that has Fitch anxious. Riley commented the U.S. political environment is not where it should be for a country wearing the firm's AAA "gold star" rating.

The last several years have been spoiled by "self-inflicted crises" between deadlines, Riley added.

What promoted Fitch's warning were words Monday from U.S. Treasury Secretary Timothy Geithner.

In a letter to Congress, Geithner pushed for policymakers in Washington to raise debt limit or risk "irreparable" economic harm.

"It must be understood that the nation's creditworthiness is not a bargaining chip or a hostage that can be taken to advance any political agenda," Geithner wrote. He also noted that Congress has never failed to raise the nation's debt ceiling.

The very first U.S. credit rating downgrade by a "Big Three" agency was in August 2011 when Standard & Poor's stripped the U.S. of its AAA rating after a drawn-out clash in Congress over raising the debt ceiling.

Rounding out the "Big Three" trio is Moody's, which also has a "negative" outlook on the United States and is also mulling a credit rating downgrade.

The Impact of a U.S. Credit Rating Downgrade

A U.S. credit rating downgrade reflects a greater risk of default, instability, unpredictability and highlights the growing inability of the U.S government to carry out its duties.

As a result, it forces the U.S. Treasury to pay more to borrow.

A downgrade would have a ripple effect worldwide. Scores of global countries buy and hold U.S. debt. China, Japan, Brazil, Taiwan, Russia, Switzerland, Luxemburg, Hong Kong, Belgium and United Kingdom make up the top ten holders.

Should Europe and Japan attain healthy status, their currencies could morph into a possible option to the U.S. dollar as the reserve currency. Plus, China could take its deep-filled pockets elsewhere, or turn to the dollar alternative--gold.

After the August 2011 downgrade, the S&P 500 Index plummeted by nearly 7%. Market participants panicked, ran for the exits and flocked to safe haven gold.

A second U.S. credit rating downgrade would add another blemish to America's tattered political reputation. And with markets already on shaky ground, another downgrade would unquestionably stoke a bearish sentiment amid traders and investors.

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