Fitch Places US “AAA” Credit Rating on Negative Watch Amid Debt Ceiling Impasse

Fitch, one of the top three credit rating agencies along with Moody’s and S&P, has placed the US “AAA” on “rating watch negative,” signalling that it could downgrade US debt if lawmakers do not agree on a bill that raises US Treasury’s debt limit.^[0] This warning from Fitch reflects the increasing concern over the political partisanship that is hindering reaching a resolution to raise or suspend the debt limit, despite the fast-approaching X date, at which point the government is expected to run out of options to fund itself. Fitch still expects a resolution to the debt limit before the X date, but it believes that risks have risen that the debt limit will not be raised or suspended before that point, and that the government could begin to miss payments on some of its obligations.^[1]

Economists predict that a default could lead the US into a recession with a significant rise in consumer borrowing costs and job losses, which could potentially impact the upcoming election year.^[2] Even if a default is avoided, there is a risk that America’s ability to borrow cheaply, a key strength of the US economy, will be diminished if Moody’s or another credit ratings firm downgrades the country’s credit rating. In 2011, when the debt ceiling was being debated, S&P withdrew its flawless credit rating for the United States.

While Fitch emphasised the low probability of a debt default, the ratings agency said that such a scenario would result in the U.S. being downgraded to a Restricted Default, and that debt securities affected by the default would be downgraded to a ‘D’- its lowest rating. Fitch's action does not involve a credit downgrade; rather it indicates a rise in the peril of a default.^[3] In 2011, Moody's and S&P, two additional credit ratings agencies, cautioned about the possibility of economic disaster in Washington due to political maneuvering.^[3]

The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness, Fitch warned. According to Fitch, the United States government is expected to have a deficit of 6.5% of the nation's entire economy in 2023 and 6.9% in 2024 due to its spending exceeding its earnings.^[4]

House Speaker Kevin McCarthy expressed optimism that White House and GOP negotiators would reach a deal in time to avert a potentially catastrophic default.^[5] However, JPMorgan Chase & Co. chief US economist Michael Feroli warned that his team now puts the odds of hitting the June 1 “X-date” without a deal “at around 25% and rising.” House lawmakers are expected to leave town on Thursday for the Memorial Day holiday weekend.^[5] Republican leaders have asked that they be able to return on 24 hours’ notice if a vote is called.^[5]

In conclusion, the US is in danger of losing Fitch Ratings' top sovereign debt status due to “increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit.” While there is still hope that a resolution will be reached before the X date, the increasing risk of a default is a cause for concern for the US economy and its citizens.

0. “Fitch places US on rating watch negative amid debt ceiling fight” LocalNews8.com, 25 May. 2023, https://localnews8.com/news/2023/05/24/fitch-places-us-on-rating-watch-negative-amid-debt-ceiling-fight/

1. “Moody's places U.S.'s ‘AAA” rating on watch negative (DXY)” Seeking Alpha, 24 May. 2023, https://seekingalpha.com/news/3974881-moodys-places-uss-aaa-rating-on-watch-negative

2. “US AAA credit rating may be cut by Fitch on debt-limit impasse” Moneycontrol, 25 May. 2023, https://www.moneycontrol.com/news/world/us-aaa-credit-rating-may-be-cut-by-fitch-on-debt-limit-impasse-10655591.html

3. “Fitch threatens to downgrade US's ‘AAA' credit rating over debt ceiling standoff” Washington Examiner, 25 May. 2023, https://www.washingtonexaminer.com/news/house/fitch-aaa-credit-rating-debt-ceiling-standoff

4. “Fitch puts U.S. on negative rating watch amid debt deal deadlock By Investing.com” Investing.com, 25 May. 2023, https://www.investing.com/news/economy/fitch-puts-us-on-negative-rating-watch-amid-debt-deal-deadlock-3090326

5. “McCarthy Signals Debt Deal Optimism as US Put on Credit Watch” Yahoo Finance, 24 May. 2023, https://finance.yahoo.com/news/mccarthy-signals-debt-deal-optimism-235010228.html