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US AAA credit rating may be cut by Fitch on debt-limit impasse

The company said it still expected a resolution to the debt limit situation



Markets have been showing increasing signs of concerns over the standoff, with rising premiums on bills maturing when the risk of default is highest while the S&P 500 Index has declined for two days.
Image Credit: REUTERS

Washington: Fitch Ratings said it may downgrade the US’ AAA credit rating to reflect the worsening political standoff that’s preventing a deal to solve the nation’s debt-ceiling crisis.

The warning is due to the increased partisanship that is hindering a resolution to raise or suspend the debt limit despite the fast-approaching so-called X date, the ratings company said in a statement, referring to the point at which the government runs out of cash. It moved the US to “rating watch negative” under its classification system.

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The yen, a traditional haven currency, spiked as traders reacted to the news before paring gains. Benchmark Treasury yields edged lower in early Asia trading Thursday.

Markets have been showing increasing signs of concerns over the standoff, with rising premiums on bills maturing when the risk of default is highest while the S&P 500 Index has declined for two days.

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Fitch’s announcement is “a bit of a slap” to the negotiators from the White House and the Republicans, said Tony Sycamore, an analyst at IG Australia in Sydney. “It just adds urgency that these two guys get together, or these two parties get together because their lack of action is making the ratings agencies nervous, and I think the markets are very nervous as well.”

In 2011, S&P Global Ratings drew fire for downgrading the US from AAA after a similar brush with default. That spurred a selloff in risk assets like equities around the world, but boosted Treasuries as investors sought out havens.
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Economists project a US default could trigger a recession, with widespread job losses and a surge in borrowing costs. Still, it’s not unusual for Congress to strike deals at the last minute when the pressure becomes big enough to force negotiators to make painful choices.

“We believe risks have risen that the debt limit will not be raised or suspended before the X-date and consequently that the government could begin to miss payments on some of its obligations,” Fitch said in its statement. “Prioritization of debt securities over other due payments after the X-date would avoid a default.”

The company said it still expected a resolution to the debt limit situation.

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House Speaker Kevin McCarthy expressed optimism Wednesday that White House and GOP negotiators would reach a deal in time to avert a potentially catastrophic default.

The California Republican’s comments came after a four-hour meeting between his and President Joe Biden’s hand-picked negotiators, fueling optimism Congress will act before June 1, the date by which Treasury Secretary Janet Yellen has warned the US could run out of money to pay its bills.

“I still think we have time to get an agreement, and get it done,” McCarthy said after the meeting concluded.
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Moody’s Investors Service’s William Foster, a senior credit officer, said in an interview last week that he was “hearing the right things out of Washington,” and his firm has kept the US’s top rating intact through the fitful negotiations since.

S&P has retained a stable outlook on the rating during the latest fracas, anticipating a deal will be struck.

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The Fitch warning is “certainly very symbolic, and in a way it may force Moody’s to follow suit,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “It will also place more scrutiny on the dollar and Treasuries as havens and its risk-free rate qualities.”

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