U.S. credit rating at risk if debt limit is not raised in a ‘timely manner,’ Fitch warns

Reporting from Washington —  The nation’s credit rating is at risk if the $19.9-trillion debt limit is not raised “in a timely manner” before the Treasury runs out of cash in October, Fitch Ratings warned on Wednesday.

“Brinkmanship over the debt limit could ultimately have rating consequences, as failure to raise it would jeopardize the Treasury’s ability to meet debt service and other obligations,” Fitch, one of the three leading credit-rating companies, said after President Trump on Tuesday raised the possibility of a government shutdown over funding a Mexican border wall.

Federal spending is only authorized through Sept. 30 as Congress works to pass a new budget and faces a potential showdown over funding for the wall, which Trump had vowed during his campaign would be paid for by Mexico.

A government shutdown “would not have a direct impact” on the nation’s AAA rating, “but it would highlight how political divisions pose challenges to the budgetary process,” Fitch said.

Failure to raise the debt limit, however, would threaten that top-level credit rating, even if the Treasury Department were to try to prioritize its debt payments, Fitch said.

Some Republicans have suggested such a move would allow the Treasury to use incoming revenues to avoid defaulting on government bonds after it runs out of cash to pay all the nation’s bills. But experts have said that might not be legal or even technically possible given how the Treasury processes payments.

“We have previously said that prioritizing debt service payments over other obligations if the limit is not raised — if legally and technically feasible — may not be compatible with ‘AAA’ status,” Fitch said.

The U.S. hit its debt limit in March, and the Treasury Department has been using accounting maneuvers ever since to free up cash to pay the government’s bills. The Congressional Budget Office estimates the Treasury will exhaust those measures and run out of cash in early to mid-October.

Treasury Secretary Steven T. Mnuchin has been pushing Congress to raise the debt limit. Appearing with Mnuchin at an event in Kentucky this week, Senate Majority Leader Mitch McConnell (R-Ky.) said there was “zero chance” the debt limit would not be raised.

But some Republicans have been urging Congress to attach spending limits and other conditions to a debt limit increase, which could endanger its passage. And Trump has a rocky relationship with McConnell, whom the president has publicly derided.

A 2011 standoff in which the limit wasn’t raised until the last minute caused Standard & Poor’s to downgrade the nation’s AAA credit rating for the first time.

The delay in raising the limit roiled financial markets. It also caused the Treasury to pay an additional $1.3 billion in borrowing costs for that year alone, according to the Government Accountability Office.

Another showdown two years later — again resolved before a default — increased the Treasury Department’s borrowing costs by $38 million to $70 million as investors avoided buying bonds the government might not be able to repay, the GAO said.

Fitch and the other leading credit rating company, Moody’s Investors Service, have maintained the U.S. AAA rating.

Moody’s said in March that although “the legislative process will inevitably be noisy,” it expected Congress to raise the debt limit before the Treasury runs out of its accounting maneuvers.

But Moody’s said it believed that the Treasury could prioritize interest payments on the federal debt “to preserve the full faith and credit of the U.S. government and to avoid disruption of the financial markets” if the limit is not raised before then.

Twitter: @JimPuzzanghera

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UPDATES:

10:15 a.m.: This article was updated with previous comments from Moody’s Investors Service

This article originally was published at 9:30 a.m.