US rating put on negative watch on default fears
Fitch Ratings on Tuesday placed the triple A credit rating of the US on negative watch, as efforts to strike a deal to end the impasse in Washington faltered in Congress. As the chances of the US missing the deadline to raise its $16.7tn borrowing limit increased, top House Republicans were scrambling to rally their conservative rank-and-file around a plan to raise the debt ceiling until February and reopen the government until mid-December. The move came as America faced a Thursday deadline when it will not be able to borrow more money to pay all its bills. The decision by House Republicans to pursue their own legislation caught the Senate off guard, and prompted the suspension of discussions on a compromise in the upper chamber between Republicans and Democrats. Earlier in the day, John Boehner, Republican House speaker, emerged from a closed-door meeting with his party members without any concrete plan to solve the crisis. "There are a lot of opinions about what direction to go – there have been no decisions about what exactly we will do but we’re going to continue to work with our members on both sides of the aisle," Mr Boehner told reporters. Later in the afternoon, Mr Boehner and House leaders finally converged on a bill – though it was still unclear whether it would have the votes to pass. If it misses the October 17 deadline to raise the debt ceiling, the Treasury would be left with $30bn in cash to pay its bills, and would have to manage its finances as best it could with income revenue. At some point in the next few weeks, it could potentially default on its debt. One-month Treasury bills maturing on October 31 shot up 21 basis points to a new debt ceiling peak of 53bps late on Tuesday, as investors grew alarmed by the lack of a deal so close to the Treasury’s self-imposed deadline of Thursday. "We are seeing a lack of liquidity in the bill market and that is exacerbating the move in yields," said John Brady, senior vice-president at RJ O’Brien. "People are stepping away from the market." The rise in T-bills sparked a rebound in gold with the precious metal up 0.7 per cent to $1,281 an ounce, after it had touched a low of $1,251. Major banks have been escalating their preparations for the US missing the deadline, with Citigroup outlining contingency measures with its results on Tuesday. John Gerspach, Citi’s chief financial officer, said the bank no longer held US Treasuries maturing before November 1, and had minimal exposure to US debt maturing before November 16. "Hope is not a plan, therefore we’ve been preparing for different contingencies over the recent weeks. As with any potential crisis that means managing our risk prudently and ensuring that we’ve got immediately liquidity on hand," he said. The bill floated by Republican leaders closely resembled compromise legislation being drafted in the Senate, with some modifications. It would reopen government agencies on December 15, instead of mid January. As was the case in the Senate, it would raise the US debt limit until February 7, meaning that the sides were not too far apart in principle. On Tuesday afternoon, House Republicans decided to strip out language delaying a medical devices tax that pays for the 2010 health reform bill. They are also not seeking tougher income verification for recipients of subsidies under "Obamacare". But they are demanding the end to federal subsidies for the healthcare coverage of members of Congress and their staff. In addition, the House bill would strip the Treasury department’s authority to use "extraordinary measures" to manage its cash and fend off default, which the White House and Democrats are resisting. The White House called the initial plan floated in the House "a partisan attempt to appease a small group of Tea Party Republicans who forced the government shutdown in the first place", according to Amy Brundage, a spokeswoman for President Barack Obama. "Democrats and Republicans in the Senate have been working in a bipartisan, good-faith effort to end the manufactured crises that have already harmed American families and business owners. With only a couple days remaining until the United States exhausts its borrowing authority, it’s time for the House to do the same," Ms Brundage added.