US Default Threat Prompts Downgrade Warning

The credit rating agency Fitch has warned it is reviewing the US government's AAA credit rating for a possible downgrade, citing the impasse in Washington that has raised the threat of a default on the nation's debt.

Fitch placed the US credit rating on negative watch as House and Senate leaders face a Thursday deadline to raise the nation's $16.7trn (£10.4trn) borrowing limit.

The agency said that while it expects the debt limit to be raised soon, "the political brinkmanship and reduced financing flexibility could increase the risk of a US default".

A Treasury Department spokesman said Fitch's announcement, which was made after US financial markets closed on Tuesday, "reflects the urgency with which Congress should act to remove the threat of default hanging over the economy".

Politicians spent most of Tuesday trying to reach an agreement to lift the government's borrowing limit and avoid a potential default.

The partial government shutdown has entered its third week

However, experts said that even without a deal, it was possible that US government contingency planning could mean bills continued to be paid after Thursday through tax revenues or the printing of money.

If leaders are able to forge a deal, it would potentially extend US borrowing authority until February 7 and fund government agencies until January 15, ending the partial shutdown of government operations which has lasted more than two weeks.

The renewed push in the Senate followed chaotic developments in the House that saw two separate GOP plans buried after it became apparent they failed to gain enough support among Republican rank-and-file.

Senator Barbara Mikulski, a Democrat, stood on the Senate floor at mid-afternoon and declared: "We are 33 hours away from becoming a deadbeat nation (that does not pay) its bills to its own people and other creditors."

Polls indicate that Republicans are bearing the brunt of public anger over the deadlock.

Many Americans are unhappy with the way budget talks have been handled

A Washington Post/ABC News poll released on Monday found that 74% of Americans disapprove of the way congressional Republicans have handled the standoff, compared with a 53% disapproval rating for Obama.

Even if a deal is done to avert a default, ratings agencies will maintain their pressure on the world's biggest economy.

A credit rating, provided by an agency, is an assessment of how able a country or company is to repay the money it has borrowed.

An AAA rating lets companies and governments borrow at super-low rates because the investments in the resulting bonds are seen as of little risk.

Standard & Poors downgraded US long-term debt to AA+ in August 2011 because of the mountain of borrowing undertaken by the country and its failure to tackle it.

So far, most investors have remained confident in US debt, though rates have risen on short-term Treasury bills.

Further evidence of nerves emerged when the Dow Jones closed sharply down on Tuesday, while a cautious approach was taken in Europe in early trading on Wednesday.

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