Fitch Ratings on Monday reiterated its view that if the US debt ceiling is not raised prior to August 2, the agency will place the US AAA rating on what it terms "ratings watch negative," meaning it could downgrade it within three to six-months. Fitch prefaced its statement by saying it still believes an agreement on the debt ceiling will met before the deadline set by the US Treasury.
"Agreement on a credible fiscal consolidation strategy will secure the US 'AAA' status; failure to do so will inevitably weaken the sovereign credit profile and may result in a sovereign rating downgrade," Fitch said.
The US Treasury Department has said if the debt ceiling is not raised by August 2, it will have to start prioritising payments.
The only time Fitch put the US sovereign on "ratings watch negative," or RWN, was November 13, 1995. It was removed on April 1, 1996. This was the period when Republicans in Congress refused to fund some federal agencies, resulting in parts of the government running out of money and shutting down.
A ratings downgrade would have a negative impact on government sponsored entities such as Fannie Mae and Freddie Mac, other GSEs such as the Federal Home Loan Banks and the Federal Deposit Insurance Corp guaranteed debt issued by US banks.
"For each category above, in the event the US debt ceiling was not raised and the US sovereign rating was placed on RWN, Fitch would immediately place all of the AAA issuer and issue ratings listed on RWN," Fitch said in its report.
Fannie and Freddie, both of which were taken over by the US government when the financial crisis hit a crescendo in September 2008, are considered the most vulnerable to a downgrade or a default because they are both regular issuers of debt used to finance the US housing industry. The placement of an RWN or RD (restricted default) moniker "may create challenges for Fannie or Freddie to issue debt in the capital markets," Fitch said.
In June, Fitch laid out a roadmap for its actions, saying if the debt limit is not increased and the US cannot meet its immediate obligations for a debt payment on August 4, it would place that specific security at a B-plus rating, down from AAA.
"If the default persisted and additional payments due on Treasury securities were missed, the US sovereign rating would be lowered to 'RD' and all outstanding Treasury securities rated by Fitch would be lowered to 'B+'," Monday's report said.