The U.S. is the only big country with a debt ceiling. The Post's Karen Tumulty explains why. (The Washington Post)

Stock and bond markets — as well as the system of daily borrowing that helps banks operate and companies make payroll — are flashing increasing concern about whether Congress will find agreement to raise the federal debt ceiling, suggesting that investors may not give lawmakers much more time to haggle before markets swoon.

On Tuesday, Fitch Ratings warned that it could downgrade the nation’s credit rating by the end of the year if the showdown in Washington continues. Fitch would become the second major credit-rating firm to strip the United States of its pristine AAA rating, which could have ripple effects across a range of markets dependent on U.S. government debt.

“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.

Since 1980, the debt ceiling has been raised 42 times.

“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.”

These markets have already shown signs of stress, Rice said, with interest rates rising. “If that starts to spread, you’re going to start seeing the opportunity for a real crisis.”

Similar concern came from outside the financial sector. A spokesman for a major U.S. manufacturing company, who was not authorized to speak publicly about the financial situation, said his firm was “avoiding securities that might get seized up” in the event of a U.S. government default.

A critical question is whether the Treasury Department will be able to pay bondholders if Congress fails to raise the debt ceiling on time. Many on Wall Street have suggested that the department would endeavor to do so, given the consequences of missing payments.

But Fitch expressed no such confidence Tuesday. “The Treasury may be unable to prioritise debt service, and it is unclear whether it even has the legal authority to do so,” analysts wrote.

If the government does in fact miss a payment on the federal debt, Fitch and other credit-
rating firms say they will automatically downgrade the United States to a “default” rating — which would force numerous funds that hold Treasury bonds to sell.

Fitch said it could still downgrade even if the debt ceiling is resolved, saying that a short-term solution might not be enough to shore up investor confidence. That is what Standard & Poor’s did in 2011 after a similar impasse.

A second downgrade would be important because many firms can hold only investments rated AAA by at least two of three major rating firms.

Obama administration officials cited the Fitch action to underscore that Congress needs to move quickly to raise the $16.7 trillion debt ceiling. A senior Treasury Department official who was not authorized to speak on the record said that “the announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy.”

If investors start to panic, the Treasury Department could have trouble as soon as Thursday, when it must refinance more than $100 billion in debt. If it gets past that benchmark, the situation becomes gloomier.

After Thursday, the government says it will run out of borrowing authority, surviving only through cash on hand and daily tax receipts.

Administration officials have been coy about how much time they would have before running out of funds to make all payments and what steps they would take to manage the fallout.

Independent analysts suggest the government will probably have another week before missing payments, though they are not certain.

The first significant danger date is Oct. 23, when the government is scheduled to make $12 billion in Social Security payments. Another risky date is Oct. 24, when the government must refinance $57 billion in debt.

“Given the volatility in the Treasury’s daily cash flows, as the Treasury’s cash balance dwindles the risk of a failure to make scheduled payments increases,” Goldman Sachs analysts said Tuesday.

By Nov. 1 — when the government has tens of billions of dollars of payments to make toward Social Security and other programs — no analysts expect the administration to be able to make all payments.

At that point, the Treasury Department would also be at high risk of defaulting on the debt and failing to pay bondholders, triggering a financial catastrophe, analysts say.

Danielle Douglas and Steven Mufson contributed to this report.