The lack of agreement on the US debt ceiling causes Fitch to put it on “negative watch”

2023-05-25 04:32:41

The Rating agency Fitch put US debt on “negative watch” on Wednesday, which has the highest grade (AAA) awarded by the firm, due to the lack of progress between the Democratic and Republican parties to reach a budget agreement that avoids suspension of payments. The agency indicated in a note that this alert for the possible reduction “reflects the increase in political partisanship that is blocking the scope of a resolution to raise or suspend the debt limit despite the rapid proximity of date X”, around the June 1.

Date X is when the Treasury Department estimates that the country’s reserves will run out if Congress fails to agree to raise the debt ceiling, which was reached in January and marks the legal limit to the money the government can borrow. Fitch said that it expects “a resolution on the debt limit before date X”, but believes that the risks have “increased” that it will not be raised or suspended before that moment and that, “consequently, the Government may begin to default on some of its obligations”.

Despite everything, the agency qualified its message by pointing out that estimates “a very low probability” that the US does not comply with the payments on the debt titles “in full and on time”, and also has expectations that this “will remain at ‘AAA’ even in the scenario of a suspension of payments”.

President Joe Biden and the leader of the Republicans in Congress, Kevin McCarthy, assured this Wednesday that the suspension of payments is not an option and they are moving forward, but the situation seems stuck, with the president refusing to accept the demands of the opposition to spending less than last year.

While US debt is often seen as a safe asset in financial markets, from time to time the country faces default because the government can only borrow up to the limit set by Congress. In general, the country tends to raise or suspend the limit without conditions, as the White House demands, and this is what has happened on more than 70 occasions since the 1970s. In 2011, a situation very similar to the current one resulted in the reduction of the country’s credit rating by the risk agency Standard & Poor’s from “AAA” to “AA+”.