The announcement puts the U.S. on notice of a possible downgrade. | REUTERS Fitch puts U.S. credit rating on notice

Fitch Ratings on Tuesday scolded Congress for getting too close to the Thursday deadline for raising the debt ceiling and put the government on notice that the firm could downgrade its rating of U.S. debt if the standoff continues.

For now Fitch is leaving U.S. credit rating where it is — a pristine ‘AAA’ — but it outlined the factors that could lead to a downgrade, such as the firm’s confidence in how the government will handle future disagreements on fiscal issues.


“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,” Fitch said.

The Treasury Department says it will run out of borrowing authority on Oct. 17 after which it may soon not be able to pay all the government’s bill on time and in full.

( POLITICO's full coverage of the debt-ceiling crisis)

The announcement on Tuesday will not have an immediate direct impact on U.S. debt and is not as serious as when Standard & Poor’s downgraded the U.S. in 2011 amid the last big fight over the debt ceiling.

But it amounts to a rebuke from a key corner of the financial markets about how Washington is handling its fiscal business. Fitch last put the United States on a negative watch from November 1995 to April 1996 amid another political battle over government funding.

“The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy,” a Treasury spokesman said.

By Tuesday afternoon, discussions in the Senate to re-open the government and raise the debt ceiling were stalled, as senators waited for House Republicans to bring their own legislation to the floor — a prospect that itself was dimming by the end of the day.

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Fitch said that it would keep a close eye on how a deal to raise the debt ceiling is reached and whether it amounts to a long-term solution or a band-aid.

“In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement and the perceived risk of a similar episode occurring in the future,” Fitch said in a statement.

Fitch also said that prolonged negotiations over raising the debt ceiling “risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S.”

Senate Majority Leader Harry Reid alluded to pending actions by the credit rating firms on the Senate floor Tuesday morning.

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“I know I speak for many of us who’ve been working in good faith when I say we felt blindsided by the news from the House,” he said, warning ratings firms could announce later in the day a change in how they view U.S. debt. “But this isn’t the first time. Extremist Republicans in the House of Representatives are attempting to torpedo the Senate’s bipartisan progress with a bill that can’t pass the Senate – can’t pass the Senate and won’t pass the Senate.”

Asked about Reid’s remarks, a spokesman for Standard & Poor’s declined to address the senator’s comments but noted, “We continue to believe that there will be an 11th hour deal.”

In the event that the Treasury Department misses a payment on any publicly held debt — including Treasury bills, notes or bonds — Standard & Poor’s would change the U.S. credit rating to “SD,” or selective default. Fitch said in that situation it would downgrade the U.S. debt to “restricted default” until the default was resolved.

Credit rating firms have been under scrutiny themselves in recent years because of the role they played in the 2008 financial crisis where they gave solid ratings to mortgage backed bonds that turned out to be filled with bad loans.

With this in mind, many lawmakers brushed off the S&P downgrade in 2011 noting the firm was attempting to play political analysts. U.S. borrowing costs did not suffer due to the downgrade, leading lawmakers to further dismiss the firm’s actions.

“Anyone who thinks America is not going to pay its debts is nuts. America is going to pay its debt,” former Massachusetts Rep. Barney Frank said last year when credit rating agencies were warning lawmakers about the fiscal cliff. “This shows the absolutely wrong-headedness of the rating agencies, because after they downgraded us our costs went down.”