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Despite reaching the US$31.4 trillion debt limit in January, discussions between the White House and congressional leaders only began on May 9.
On Wednesday, the credit rating agency Fitch Ratings announced it has placed the U.S. AAA-rated long-term foreign-currency issuer default rating (IDR) on a "negative watch" as the debt ceiling deadlock continues.
"The Rating Watch Negative reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit," the agency said in a statement.
The White House and congressional Republicans are still at odds with each other on multiple aspects of spending and revenues, although talks remain on track.
Fitch said it still expects a resolution to the debt limit before the X-date when the U.S. Department of Treasury defaults on obligations under the current debt limit but "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."
— ���� ��������Dan Popescu ������������ (@PopescuCo)
May 25, 2023
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, said Fitch.
Fitch warned 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 United States to honor its obligations in a timely fashion.
Despite a very low probability event, a default would lead Fitch to downgrade U.S. long-term foreign currency IDR to Restricted Default, followed by a series of downgradings on both long-term and short-term securities.
U.S. governance is a weakness relative to peers with triple-A ratings. Recent signs of the deterioration in U.S. governance include the contested 2020 presidential election, brinkmanship over the debt limit to advance political agendas and failure to reach a consensus on the country's fiscal challenges, Fitch said.
"Political partisanship has brought about repeated debt-limit brinkmanship and led to near-default episodes that could erode confidence in the government's repayment capacity," it said.
Despite reaching the US$31.4 trillion debt limit in January, discussions between the White House and congressional leaders only began on May 9, less than a month before the estimated date of a U.S. government default on its debt obligations.
In 2021, Fitch joined S&P Global Ratings and warned that political brinkmanship over the U.S. debt limit could damage the country's otherwise top-notch credit rating.
Fitch also holds a negative view on U.S. fiscal outturns forecasting the U.S. general government deficit to rise to 6.9 percent of GDP in 2024, up from 5.5 percent in 2022 and expected 6.5 percent in 2023.
A rising interest burden and growing spending on entitlements over the coming decade will keep U.S. deficits above 7 percent of GDP on average, said Fitch.
In August 2011, S&P Global Ratings lowered the credit rating of long-term U.S. government debt from AAA to AA+ amid a debt ceiling impasse at that time.