FXstreet.com (Barcelona) - Much to the chagrin of investors, a
fresh warning from the ratings agency Fitch was issues, stating
that a debt ceiling failure would likely cause a ratings review.
"…With no legal authorization for net debt issuance, the Treasury
would be forced to immediately eliminate the deficit - a fiscal
contraction twice as great as the recently avoided 'fiscal cliff' -
arrears on such obligations would not constitute a default event
from a sovereign rating perspective, but very likely prompt a
downgrade even as debt obligations continued to be met."
As such, Fitch Ratings' expectation - along with that of the
American public and general contingent of market participants - is
that Congress will raise the debt ceiling, thereby leaving the risk
of a U.S. sovereign default as extremely low. "Nonetheless, a,
failure to raise the debt ceiling in a timely manner will prompt a
formal review of the U.S. sovereign ratings." notes Joe Wiesenthal.
Looking back at 31 December 2012, the U.S. federal government debt
reached the statutory debt limit of USD $16.394 trillion and
consequently the Treasury began to implement extraordinary measures
that will create an estimated USD $200 billion of additional
breathing space under the debt ceiling. However, a repeat of the
fabled August 2011 'debt ceiling crisis' would oblige Fitch to
renew and review its current assessment of the reliability and
predictability of the institutional policy framework and prospects
for reaching agreement on a credible medium-term deficit reduction
plan.
According to Fitch analysts, the debt ceiling is an ineffective and
potentially dangerous mechanism for enforcing fiscal discipline -
it does not prevent tax and spending decisions that will incur debt
issuance in excess of the ceiling while the sanction of not raising
the ceiling risks a sovereign default and renders such a threat
incredible.
Never mind that the statutory limitation on federal debt is a
long-standing feature of the U.S. fiscal framework and applies to
nearly all Treasury debt, whether held by the public or in
government accounts.
The fact of the matter is that any protracted debate prior to
increasing the debt ceiling is not an exceptional event, however
against the backdrop of unprecedentedly large peacetime budget
deficits and outstanding debt, any delay in raising the limit would
pose ever increasing risks to the ability of the federal government
to honor its obligations in a timely fashion. The last time
Congress approved an increase in the debt ceiling in August 2011,
the federal government came precariously close to being in a
situation where, in the words of the Treasury Secretary, it would
be unable "to meet our commitments securely".