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Fitch Ratings says it might downgrade U.S. debt if lawmakers fail to increase the nation's borrowing limit before the government runs out of money in August.
The rating agency, based in New York, said Wednesday that it will put the debt on watch for a possible downgrade if lawmakers have not reached a deal by Aug. 2. That's the date by which the Treasury Department will have exhausted stopgap measures it is using to delay a default.
Fitch expects the debt ceiling to be increased. If that doesn't happen, the nation might default, implying "a crisis of governance" and threatening the stability of the world financial system, the rating agency said.
"Default by the world's largest borrower and issuer of the pre-eminent reserve currency would be extraordinary and threaten the still fragile financial stability in the U.S. and the world as a whole, especially against the backdrop of the European sovereign debt crisis," said David Riley, head of Sovereign Ratings at Fitch, in a statement.
A lower credit rating could spread through the economy, increasing the cost of borrowing for consumers and businesses That's because many loans, including mortgages, tend to follow yields on U.S. Treasury bonds. If investors demand higher yields to offset the increased risk associated with Treasury debt, rates for other loans would rise, as well.
If borrowing and spending decrease sharply, the sluggish economic recovery could run out of steam.