Fitch: US Debt Limit Deadline Back in Focus

Reuters

Feb 5 (Reuters) - (The following statement was released by the rating agency)

New dates and deadlines for agreeing a revised US federal government debt limit are back in focus and will be a key driver for resolving the Rating Watch Negative (RWN) Fitch assigned to the 'AAA' US sovereign rating on 15 October 2013.

The debt limit - the maximum amount of debt the federal government can issue to the public and other federal agencies - was suspended on 17 October 2013 until 7 February 2014, as a short-term fix to the debt ceiling crisis in October. On 8 February 2014, the limit will be reset at the level of debt at that date. The latest figure for the amount of debt subject to the limit is USD17.3trn.

We expect the debt ceiling will be raised (or suspended) before the Treasury exhausts its borrowing capacity. Timely resolution of the debt limit is necessary to avoid immediate uncertainties about the Treasury's ability to remain current on its obligations, including payments on Treasury securities. If the debt ceiling is not raised or suspended again from 8 February then the Treasury would have to deploy extraordinary measures to access new funding. However, these would buy only limited time before the Treasury runs out of new borrowing capacity (though it can continue to roll-over maturing debt). This so-called 'X date' would be comparable to 17 October in the previous crisis. In his letter of 22 January to Congress, Treasury Secretary Jack Lew said the Treasury is likely to exhaust its extraordinary measures in late February. The Bipartisan Policy Centre estimates a likely range of 28 February to 25 March; while earlier the Congressional Budget Office (CBO) estimated that they would probably be exhausted in March, but could last as long as until June. The timeframe for using extraordinary measures is shorter and more uncertain than when they were deployed between 18 May 2013 and 17 October 2013. This is because the federal government typically runs large deficits in February and March when it issues sizeable tax refunds, before typically running a surplus in April when it receives positive cash flow from personal income tax payments.

Also important in Fitch's view is the avoidance of short-term uncertainties about Congressional intentions on raising the limit. As we have said previously, repeatedly casting uncertainty over the full faith and credit of the US risks undermining confidence in the role of the US dollar, having a detrimental effect on the economy, and is not a characteristic typical of a 'AAA' sovereign. Having the world's preeminent reserve currency affords the US government incomparable financing flexibility and is a key reason why the US 'AAA' rating can tolerate a higher level of public debt than other 'AAAs'.

The next scheduled review of the US rating is Friday March 21, although the review could be brought forward to reflect developments and events. Fitch's rating review will consider the timeliness of an agreement to raise the debt limit, the projected time before which the new limit would become binding and the risk of a similar episode re-occurring in the near term.

The rating review will also focus on the outlook for the US public finances, including projections and forward-looking judgments on fiscal measures, the budget deficit and the government debt/GDP ratio. Prior to placing the 'AAA' on RWN it had been on Negative Outlook since November 2011 because of adverse trends in the public finances.

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