The US could lose its top credit rating for the second time if there is a delay in raising the country's debt ceiling, Fitch Ratings warned today.
Congress has to increase the country's debt limit, which effectively rules how much debt the US can have, by March 1 or face a potential default.
There are fears that the debate will descend into the sort of squabbling and political brinkmanship that marked the last effort to raise the ceiling in the summer of 2011.
The US Treasury Department warned then that it had nearly reached a point where it would be unable "to meet our commitments securely."
Standard & Poor's was so concerned by the dysfunctional nature of the 2011 debate that it stripped the US of its triple A rating for the first time in the country's history.
"The pressure on the US rating, if anything, is increasing," said David Riley, managing director of Fitch Ratings' global sovereigns division.
"We thought the 2011 crisis was a one-off event - if we have a repeat we will place the US rating under review,'' he added.
Fitch already has a negative outlook on the US and has said it will make a decision on the rating this year, regardless of how the debt ceiling discussions pan out.
The US government reached its statutory debt limit of nearly $16.4 trillion at the end of 2012 but has engineered extraordinary measures that should see it through to February.
Riley's comments come just two weeks after US lawmakers agreed a budget deal with the White House that avoided the so-called "fiscal cliff" of automatic tax increases and spending cuts that many economists thought could plunge the US economy, the world's largest, back into recession.
Relief that a deal was cobbled together, albeit at the final hour, is one of the reasons why sentiment in the financial markets has been buoyant in the first trading days of the new year. Many stock indexes around the world are trading at multi-year highs.
Riley warned that the different arms of the US government still have a number of issues to address. As well as increasing the debt ceiling, they have to agree to spending cuts that were delayed as part of the fiscal cliff agreement and back measures to avoid a government shutdown, potentially in March.
Though short-term fixes are more likely than not, Riley said the US political environment is not as good as it should be for a country holding the gold-chip AAA rating. The past few years, Riley said, have been marked by "self-inflicted crises" between deadlines.
The major reason behind the lack of swift action in the US is that the Democrats control the White House and the Senate, while the Republicans have a solid majority in the House of Representatives. Both sides have differing visions of the role of the state in society and often varying political objectives.
But despite his cautious tone on the rating, Riley said the US has a number of huge advantages and that getting the country's public finances into shape will not require the same level of austerity that many countries in Europe have had to enact over the past few years, partly because the US economy is growing at a steady rate.
Bernanke urges Congress to raise debt ceiling
The US Federal Reserve Chairman has said it is important that Congress raise the US borrowing limit before the Treasury runs out of manoeuvring room to avoid a potential default on US debt.
Ben Bernanke made his comments at the University of Michigan last night.
He said the approaching debt limit is one of the "critical fiscal watersheds" for the government in coming weeks.
President Barack Obama also spoke yesterday about the urgency of raising the limit.
Obama said he would not let congressional Republicans use the debt limit as leverage in negotiations over spending cuts.
Bernanke noted that an impasse over the debt ceiling in 2011 led to a rating downgrade of long-term US debt, the first time that has occurred. He said Congress should raise the ceiling to "avoid a situation where our government doesn't pay its bills."
The Fed decided last month to keep buying $85 billion a month in Treasurys and mortgage bonds to try to keep borrowing costs low and encourage more spending. The bond-buying programme was left open-ended. But it turned out that Fed officials differed about how long the bond purchases should continue.
When the minutes of the meeting were released on January 3, they revealed that "several" committee members thought the purchases should slow or end well before year's end. These officials fear the bond buying is keeping rates so low for so long that it could ignite inflation or encourage speculative buying of risky assets.
Still, many economists have said they think the Fed will maintain its bond purchases at their current level throughout 2013.
Bernanke did not address the divisions within the Fed last night, but he said he thought the new round of bond buying was providing key support. He said the Fed will continue to assess the benefits of the bond buying against any risks of continuing the purchases.
Bernanke said the purchases have shown that the Fed still has "ammunition" to aid the economy even after having cut short-term interest rates to near zero.
Last month, the Fed also said it planned to keep its key short-term interest rate at a record low even after unemployment falls close to a normal level - which it said might take three more years. Unemployment remains high at 7.8% because the US economy is growing too slowly and not creating jobs fast enough.
In December, employers added 155,000 jobs, roughly matching the monthly average in 2011 and 2012. That has just been enough to slowly reduce the unemployment rate, which fell 0.7 percentage point during 2012.
