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Fitch puts U.S. credit rating on negative watch

The Fitch credit rating agency has warned that it is reviewing the U.S. 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 U.S. credit rating on negative watch yesterday, a step that would precede an actual downgrade. The agency said it expects to conclude its review within six months.

The announcement comes as House and Senate leaders face a deadline tomorrow to raise the nation’s $16.7 trillion borrowing limit. Fitch said it expects the debt limit to be raised soon. But it adds, “the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”

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

Fitch is one of the three leading U.S. credit ratings agencies, along with Standard & Poor’s and Moody’s Investors Service. S&P downgraded U.S. long-term debt to “AA+” in August 2011.

Fitch said that the Treasury might not be able to prioritize its interest payments on U.S. debt to avoid a default. “It is unclear whether it even has the legal authority to do so,” Fitch said.

Many economists expect Treasury to prioritize its payments to stave off default. And Moody’s Investors Service said in an Oct. 7 report that Treasury would continue to make interest payments after the Thursday deadline.

A credit rating is an assessment of how able a country or company is to repay the money it’s borrowed. A AAA rating lets companies and governments borrow at super-low rates.

So far, most investors have remained confident in U.S. debt. Rates have risen on short-term Treasurys but not on longer-term debt, like the benchmark 10-year Treasury note. That shows that investors are continuing to buy that debt. The rate on the 10-year note is important because it affects rates on mortgages and many other loans.

After S&P downgraded long-term U.S. credit two years ago, investors sold stocks but continued to buy longer-term U.S. Treasurys.

Despite uncertainty over whether the government will maintain its authority to borrow, investors have continued to pour money into long-term Treasurys. The yield on the 10-year note has remained stable at slightly above 2.7 percent, a sign that investors still believe the U.S. government will repay its longer-term debt.

The U.S. government has never intentionally failed to pay its debts. That’s why investors consider Treasurys the safest and most liquid investments in times of uncertainty. Treasurys are also denominated in dollars, the main currency used by central banks and financial institutions around the world.

Lawmakers spent most of yesterday trying to reach an agreement to give Treasury authority to borrow and avoid an eventual default.

House Republicans pushed for passage of legislation late Tuesday that would allow the Treasury to borrow normally until early February and end a 15-day partial government shutdown at least until Dec. 15.

While the House readied for a possible Tuesday night vote, the immediate result was to impose a daylong freeze on Senate negotiations on a bipartisan compromise.

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