Fitch issues warning on U.S. credit ratings; default could cause global shock, Fed official says

A U.S. default would have severe reverberations in global markets, a top Federal Reserve official said just hours after Fitch Ratings warned it could slash U.S. credit ratings if the government misses bond payments.

St. Louis Federal Reserve Bank President James Bullard said “the U.S. fiscal situation, if not handled correctly, could turn into a global macro shock.”

“The idea that the U.S. could threaten to default is a dangerous one,” he said. “The reverberations in those global markets would be very severe.”

Some Republican lawmakers have said a brief default, which would be inevitable in August if lawmakers fail to raise the nation’s $14.3-trillion debt ceiling, might be acceptable if it forces the White House to deal with large budget deficits.

Bullard’s warning came just after Fitch said it would slash to “junk” the ratings on all U.S. Treasury securities, seen worldwide as a risk-free investment, if the government misses debt payments by Aug. 15.

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

“The notion of flirting with a default on existing obligations flirts with irresponsibility,” said Richard Bernstein, chief executive of Richard Bernstein Capital Management.

The White House said Fitch’s warning makes it clear that “there is no alternative to raising the debt ceiling.”

“This is not about additional spending; this is about honoring the obligations the United States government has made,” White House Press Secretary Jay Carney said at a daily briefing.

Moody’s Investors Service and Standard and Poor’s have issued similar warnings. But Fitch was the first among the big three rating firms to say U.S. Treasury securities could be downgraded, even for a short period, to non-investment grade.

Fitch said even a short-lived default, also called a technical default, “would suggest a crisis of governance from a sovereign credit and rating perspective.”