Updated, 5:20 p.m.
Senate Majority Leader Harry Reid said on the floor a bit after 11:30 a.m. Tuesday that rating agencies are talking about downgrading U.S. debt “as soon as tonight.”
The remark likely did not arise from inside knowledge about the plans of ratings agencies, a Reid adviser says. ”To my knowledge, he has not been briefed,” said Adam Jentleson, Reid’s spokesman.
But after markets closed Tuesday evening, Fitch Ratings placed the U.S. credit rating under review for a downgrade, citing risks stemming from the looming debt crisis. ”Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default,” the agency wrote.
The move is not a downgrade, or an indictment of broader U.S. economic conditions. Rather, it is a warning issued on the basis of Congressional negotiators’ inability to break the partisan impasse and extend U.S. borrowing authority before the Treasury Department-imposed deadline of Oct. 17. “The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy,” a Treasury Department spokesperson said.
Just hours ago, Reid’s remarks looked like an attempt to motivate House Republicans to move quickly on their proposal to avert default and open the government, which has stalled since its leadership outlined the plan to the party conference Tuesday morning. An aide to Minority Leader Mitch McConnell (R-Ky.) said that McConnell had also not been briefed on the topic of ratings company plans.
Fitch is not the first agency to warn investors about the dangers of budget brinkmanship. Standard and Poor’s downgraded the long-term sovereign credit rating of the U.S. to ‘AA+’ from ‘AAA’ in 2011, citing “political brinksmanship,” but it is seen as unlikely that Standard and Poor’s will downgrade the country again. ”This level of brinksmanship is already factored into our AA+ rating,” says John Piecuch, a S&P Director of Communications. “S&P continues to believe that there will be a resolution of the debt ceiling issue, even if at the 11th hour.”
“While it is not our expectation, if there were a missed payment, that would be a trigger for a rating change to SD [Selective Default],” Piecuch added. Standard & Poor’s lowered Cyprus’ credit rating to ”Selective Default” this summer after the government announced a voluntary debt exchange of sovereign bonds.
The financial markets showed some signs of distress Tuesday as the country nears the default deadline on Thursday. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all fell slightly in Tuesday’s afternoon trading after a four-day rally.
With reporting by Zeke J. Miller and Alex Altman