WRAPUP 1-Fitch: US Treasuries could be rated junk in August

Wed Jun 8, 2011 2:11pm EDT

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By Walter Brandimarte

NEW YORK, June 8 (Reuters) - U.S. Treasury bonds, seen worldwide as the risk-free investment, could be labeled "junk" if the government misses debt payments by Aug. 15, credit agency Fitch Ratings warned on Wednesday.

The ratings would go back up once the government fulfills its debt obligations, but probably not to the current AAA level, Fitch said on Wednesday in a stark statement about the impact of a short-lived default on U.S. credit-worthiness.

The statement follows similar warnings by Moody's and Standard & Poor's, but Fitch was the first among the big-three rating agencies to say U.S. Treasury securities could be downgraded, even for a short period of time, to a non-investment grade.

The idea of a brief U.S. default, sometimes called a technical default, has been growing among some members of the Republican Party, who believe it would be an acceptable price to pay if it forces the White House to deal with runaway spending. For details, see [ID:nN07154296].

"Even a so-called 'technical default' would suggest a crisis of 'governance' from a sovereign credit and rating perspective," Fitch said in a statement.

"Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview.

Treasury bonds could be rated "junk" by Fitch Ratings if the government misses some $82 billion in debt payments by Aug. 15 due to disagreement over the debt ceiling.

The ratings would go back up once the government fulfills its debt obligations but probably not to the current AAA level, Fitch said.

President Barack Obama is trying to win congressional approval to raise the borrowing authority before an Aug. 2 deadline.

The Treasury Department said on Wednesday the Fitch warning was "another stark reminder" of the need for Congress to act quickly. [ID:nW1E7GV016]

Fitch stressed that it believes U.S. lawmakers will ultimately reach an agreement to raise the country's debt ceiling and avoid any default.

"We know from previous experiences -- both with the government shutdown and previous episodes with the debt ceiling -- that although you get a lot of brinkmanship, ultimately it does get resolved," Riley said.

Fitch said it would first place U.S. ratings on "watch negative" if lawmakers fail to enact an increase in the U.S. debt ceiling by Aug. 2, the date when the Treasury Department will have run out of extraordinary measures to avoid a default.

The first test for U.S. ratings will come two days later when $30 billion in Treasury bills mature. If the government fails to repay them in full, Fitch will lower the rating on those specific securities to B-plus, four notches into junk territory.

But the real deadline comes on Aug. 15 when $27 billion in Treasury notes and $25 billion in coupon payments come due. If the government misses those, Fitch would downgrade the U.S. sovereign issuer ratings to "restricted default" and lower all Treasuries securities to B-plus.

"Though such an event (such as a short-lived Treasury bill default) may not permanently impair the capacity of the U.S. government to service its obligations, it is unlikely that its 'AAA' status would be retained in the short to medium term," it added.

Treasury Secretary Timothy Geithner has warned the United States could face a catastrophic default that would roil global markets if Congress does not raise the debt ceiling by then.

Moody's credit rating agency warned last Thursday that it could consider cutting the United States' top-notch credit rating if there was not progress by mid-July on a deal to reduce the deficit and raise the $14.3 trillion U.S. debt limit. (Additional reporting by Daniel Bases and Burton Frierson; Editing by Kenneth Barry)

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