Republicans and Democrats are currently locked in a heated debate over how best to address Washington's fiscal woes. Democrats say the path to fiscal sanity is through revenue generation while Republicans insist on cuts in government spending.
And while this ideological struggle has favored Democrats in recent years, credit ratings agency Fitch may have just incentivized both groups to address deficit reduction, threatening a credit downgrade if U.S. lawmakers fail to come up with “a plan to put public finances on a more sustainable footing.”
Get that? Fitch is saying, cut spending or we cut your credit rating.
“Fitch has long warned that a repeat of the 2011 debt ceiling crisis would result in a formal review of its AAA rating on U.S. sovereign debt. While it expects Congress to raise the debt ceiling ...the nature and timing of the agreement will be critical,” CNN Money reports.
The agency threatened to review the nation’s credit rating Tuesday while addressing its concerns over an increase in the nation’s debt limit.
"In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current negative outlook on the 'AAA' rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted," Fitch said in a statement.
As noted yesterday on TheBlaze, both Federal Reserve Chairman Ben Bernanke and outgoing Treasury Secretary Timothy Geithner support an increase in the debt limit. However, neither has put forward a comprehensive (or realistic) plan for dealing with the U.S.’ ballooning deficits.
“The last time Congress negotiated an increase in the debt ceiling, in August 2011, the talks went down to the wire, bringing the U.S. close to the point of being unable to meet its financial commitments. Markets took fright and Standard & Poor's cut its rating on the U.S. to AA+ from AAA,” CNN Money notes.
“Congress must also decide on the fate of spending cuts deferred under the Jan. 1 deal that averted the ‘fiscal cliff’ at the turn of the year, and renew the federal government's spending authority, due to expire March 27,” the report adds.
However, Fitch was careful to warn that another round of slipshod, last-minute patches to the nation’s fiscal woes would only “perpetuate the uncertainty over tax and spending,” which, of course, would be the opposite of putting the U.S.' finances on a “sustainable path in the medium term.”
“In the absence of a higher debt ceiling,” CNN Money continues, “the Treasury Department will have to start delaying payments as they fall due.”
Fitch said that any delay in payments would “equate to a squeeze twice the size of the ‘fiscal cliff’,’” as CNN Money puts it.
"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," Fitch warns.
Follow Becket Adams (@BecketAdams) on Twitter
(H/T: @freddoso). Featured images courtesy Getty Images. This post has been updated.