Fitch Ratings has placed the US’s foreign-currency issuer default rating on negative watch as the political stalemate around the debt ceiling increases. The rating agency is concerned that the US could default on its debt as early as June 1, should leaders fail to find a resolution. While Fitch still expects Washington officials to find a solution, the risks have increased that the debt limit will not be raised or suspended. If an agreement cannot be found before the deadline, it could be a signal that the US is unwilling to honor its obligations in a timely manner, and the country’s credit rating could suffer.
The warning comes amid deep political partisanship in Congress over raising the debt limit, with President Joe Biden offering to freeze government spending to the current level during talks with Republicans. House Speaker Kevin McCarthy stated that discussions over the debt ceiling were progressing towards a deal. However, Fitch’s measures are causing alarm, and futures linked to the Dow Jones Industrial Average initially fell by 100 points after Fitch issued its note.
As of May 23, the cash balance of the US Treasury was $76.5 billion, and analysts expect the measures put in place to avoid a breach of the debt ceiling to be completely exhausted by June 1. Fitch Ratings is cautioning that the US could face another ratings downgrade unless political leaders reach an agreement soon. Ratification of a deal could be further delayed due to the fact that the House of Representatives took a week-long recess on Thursday, but legislators have been put on notice that they could be called back for a vote.
Ratings agencies have downgraded the US before, including during a 2011 debt ceiling debate that sparked a stock market selloff. If Congress doesn’t reach a solution soon, it could result in significant economic turmoil. Meanwhile, the latest US Federal Reserve meeting minutes have revealed that officials are “less certain” about hiking interest rates, underscoring the unease surrounding the current economic climate.
In conclusion, the US’s battle for raising the debt ceiling is slowly taking a toll on its economic outlook. Failure to reach an agreement before the deadline could be disastrous, leading to the country’s default on its debt and risking a ratings downgrade that could have long-term effects. The uncertainty of the situation situations and escalating political partisanship are causing jitters on Wall Street, adding further challenges to the country as it prepares to emerge from the pandemic.
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