As U.S. Government Fiddles, Fitch Issues Warn on Debt Downgrade

As U.S. Government Fiddles, Fitch Issues Warn on Debt Downgrade
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Fitch Issues Warn on Debt Downgrade As U.S. Government Fiddles, Fitch Issues Warn on Debt DowngradeNEW YORK – On the verge of uncharted territory and paralyzed by political fighting, Fitch Ratings put the U.S. Government, and the world, on notice on Tuesday by warning that the current ‘AAA’ credit rating was on their rating watch negative list.  According to Fitch, the standstill on the U.S. debt ceiling negotiations risks undermining the effectiveness of the country’s government and political institutions.


In their notice, the debt ratings agency said, ‘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 notice sent the Dow Jones tumbling 133.25 points to close at 15,168.01, the S&P 500 fell 12.08 points to close at 1,698.06, and the NASDAQ fell 21.26 points to close at 3,794.01.

With only rumors that negotiations were taking place, no deal seems to be in place to avert what would be akin to economic suicide taking place later this week as the U.S. Government will begin to default on payments to their bondholders.  A spokesperson for the Treasury Department urged Congress to act, but it would appear that neither side is closer a deal.

To make matters worse, Senate Majority Leader Harry Reid lashed out at House Republicans, shortly after the collapse of a rival GOP proposal.  Reid warned at the time that the U.S. credit ratings could be downgraded as soon as Tuesday night – something that did not happen.

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While it is unlikely that the U.S. will be downgraded this week, a default would be met with a swift downgrade by all three leading ratings agencies.  This, in turn, would add to the cost of servicing the massive federal deficit and would put significant stress on all aspects of the global economy.

According to the Washington Post, the irony in Fitch’s statement resides in the pains it takes to point out the soundness of the fundamentals of the U.S. debt picture.  In their statement, Fitch pointed out that ‘we continue to judge that the U.S. economy (and hence tax base) remains more dynamic and resilient to shocks than its high-grade rating peers.  Fiscal and macroeconomic risks emanating from the financial sector are generally low and diminishing and becoming supportive of, rather than a drag on, economic growth.’

With only a few days left to avert what a global economic meltdown investors can only hope that politicians will finally act in a reasonable and rational way.  However, that is appearing to become unlikely, and investors should look at their portfolios to determine how a U.S. Government default would affect their holdings.