Credit ratings agency Fitch Ratings on Wednesday said a failure by U.S. officials to raise the federal debt ceiling in a timely manner would prompt it to review the U.S. sovereign rating, "with potentially negative implications."
Fitch, which currently assigns the United States its highest rating - "AAA" - said in a statement that the prioritization of debt service payments over other government obligations, should the debt ceiling not be raised, "may not be compatible with 'AAA' status."
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Without the ability to sell more debt, the government is expected to run out of cash, possibly in early October, and faces the risk of not paying the interest and principal on its debt on time. The United States defaulting on its bonds, traders fear, would rattle financial markets worldwide.
Congress has not reached a deal to raise the statutory borrowing limit, currently at $19.9 trillion, despite urging from Treasury Secretary Steven Mnuchin to do so.
"Brinkmanship over the debt limit could ultimately have rating consequences, as failure to raise it would jeopardize the Treasury's ability to meet debt service and other obligations," Fitch said in a statement.
It is not clear how lawmakers, who are in recess and will return on Sept. 5, would achieve the votes to raise the debt ceiling even as Republicans control the White House and both chambers of Congress.
"Republican fiscal conservatives are likely to make support for lifting the debt limit conditional on measures to aggressively reduce the budget deficit. A 'clean' debt limit increase, unattached to other policy measures, appears possible, although it may require support from Democrats," Fitch said.
During the debt ceiling showdown in August 2011, Standard & Poor's stripped the United States of its highest rating. It has since then kept a slightly less sterling grade of AA+ on the world's largest economy.
Like Fitch, Moody's Investors Service has maintained its top credit rating on the United States.
If either Fitch or Moody's were to follow S&P's downgrade, it could roil financial markets as investors reassess the creditworthiness of U.S. Treasuries.
"In Fitch's view, the economic impact of stopping other spending to prioritize debt repayment, and potential damage to investor confidence in the full faith and credit of the U.S., which enables its 'AAA' rating to tolerate such high public debt, would be negative for U.S. sovereign creditworthiness," Fitch said in a statement.
Immediately after S&P's downgrade six years ago, the Treasuries market rallied, sending yields lower.
U.S. Treasury benchmark yields fell to session lows in the wake of Fitch's view on its U.S. rating. At 12:11 p.m. (1611 GMT), the benchmark 10-year yield was 2.185 percent, down 3 basis points from Tuesday.
(Reporting By Dan Burns and Richard Leong; Editing by Dan Grebler)