Policy: Budgets & Deficits

Fitch warns debt ceiling fights could cost US status as global reserve currency

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Beltway Confidential,Congress,Joel Gehrke,Debt Ceiling,Budgets and Deficits,Government Shutdown,Sequester,Currency

Fitch Ratings has a negative outlook for the United States' "AAA" credit rating due to the ongoing congressional debate over the debt ceiling increase.

The struggle over the ceiling, which must be raised by Oct. 17 to avoid default, could result in further damage to the economy if the dollar no longer serves as the global reserve currency, according to Fitch.

"The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) 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.," Fitch said in an analysis released today.

"This 'faith' is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns," Fitch said.

Despite the critique of the August 2011 debt ceiling fight, Fitch noted that the sequestration spending cuts brought about by that debate shored up the nation's status as a AAA credit country.

"The 'AAA' rating also reflects the halving of the federal budget deficit since 2010, which is now approaching a level consistent with debt stabilization," Fitch's analysis said.

"The Budget Control Act passed in August 2011 implied significant fiscal consolidation and Congress and the Administration have adhered to the automatic spending cuts — the sequester — specified under the Act in the absence of agreement on an alternative and equivalent set of deficit-reduction measures. In addition, the passage of the American Taxpayer Relief Act on 1 January 2013, which implied a tax increase of more than USD600bn, has also contributed to the deficit reduction effort."

Fitch emphasized that lawmakers must "contain government deficits in the face of long-term spending pressures and place public debt on a downward path over the medium to long term."

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