“Political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default,” analysts at Fitch wrote Tuesday. “The U.S. risks being forced to incur widespread delays of payments to suppliers and employees, as well as Social Security payments to citizens — all of which would damage the perception of U.S. sovereign creditworthiness and the economy.”
Fitch’s warning is the clearest sign that the financial industry is zeroing in on the perils posed by the impasse in Washington. On Tuesday, the Dow Jones industrial average fell 133.25 points, to 15,168,01, giving back recent gains that were fed by hopes of a swift deal.
Interest rates on a wide range of U.S. government bonds also moved higher, reflecting investors’ growing doubts about whether they will be paid back in full.
“The Fitch action is another chink in the armor as the full faith and credit of the United States is called into question,” said Scott Anderson, chief economist at the Bank of the West in San Francisco. “Markets are starting to get frustrated that we haven’t seen more movement, and they’re starting to worry.”
The investor reactions come as major financial institutions and Main Street companies alike are taking steps to protect themselves and their investors from a possible U.S. government default — which the Obama administration has warned might happen if Congress fails to raise the debt ceiling soon.
On Tuesday, Citigroup chief executive Michael Corbat said the mega-bank has eliminated its holdings of very short-term Treasury bills, acting out of concern about Congress’s “dangerous flirtation with the debt ceiling.” Citigroup followed in the footsteps of JPMorgan Chase, the mutual fund giant Fidelity and other firms that have taken similar steps in recent days.
Financial executives said the growing skepticism about the safety of U.S. government debt also threatens to undermine little-known markets that serve as a critical source of funding for all sorts of companies.
In these markets, Treasury bills are considered risk-free — equivalent to cash — and are often pledged by companies as collateral to get loans that help pay salaries or finance other expenses.
“They’re the lubricant that drives the financial industry and substantial parts of the real economy,” said Bob Rice, general managing partner with Tangent Capital Partners, an investment firm. “This was the epicenter of the earthquake in 2008.”