Fitch puts US credit rating on negative watch as debt ceiling deadline looms

Fitch put the country’s “AAA” rating, its highest rank, on a negative watch in a precursor to a possible downgrade should lawmakers fail to raise the amount that the Treasury can borrow before it runs out of money, the so-called X-date.

In 2011 during extended debt ceiling negotiations, S&P downgraded the U.S. credit rating, but Fitch did not. A possible U.S. government rating downgrade could affect the pricing of trillions of dollars of Treasury debt securities.

“It’s not entirely unexpected given the shambles that is the debt ceiling negotiations,” said Tony Sycamore, analyst at IG Markets in Sydney, Australia. “This is not a great sign.”

President Joe Biden’s administration and congressional Republicans are at an impasse over raising the federal $31.4 trillion debt ceiling, with both sides casting the other’s proposals as too extreme.

Fitch said that the country’s rating could be lowered if the U.S. does not raise or suspend its debt limit in time.

While Fitch still expected a deal to be reached, it added that the risks have risen that the government could miss payments on some of its obligations.

U.S. Treasury Secretary Janet Yellen on Sunday said June 1 remained a “hard deadline” for raising the federal debt limit.

“Fitch still expects a resolution to the debt limit before the X-date,” the credit agency said in the report. “However, 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 that the failure to reach a deal to raise or suspend the debt limit by the X-date “would be a negative signal of the broader governance and willingness of the U.S. to honor its obligations in a timely fashion,” and would be unlikely to be consistent with a “AAA” rating.

Fitch now predicts that the U.S. government will spend more than it earns, creating a deficit of 6.5% of the country’s total economy in 2023 and 6.9% in 2024.

A “rating watch” indicates that there is a heightened probability of a rating change and the likely direction of such a change, and is different from a “ratings outlook” which indicates the direction a rating is likely to move over a one- to two-year period.

Among the other credit ratings agencies, Moody’s also has an “Aaa” rating for the U.S. government with a stable outlook – the highest creditworthiness evaluation Moody’s gives to borrowers.

S&P Global’s rating is “AA-plus,” its second highest. S&P stripped the United States of its coveted top rating over a debt ceiling showdown in Washington in 2011, a few days after an agreement that the agency at the time said did not stabilize “medium-term debt dynamics.”

Moody’s previously said it expects the U.S. government will continue to pay its debts on time, but public statements from lawmakers during the debt ceiling negotiations could prompt a change in its assessments of the U.S. credit outlook before a potential default.

Fitch previously put the U.S. on ratings watch negative in October 2013 during the debt ceiling spat at the time.