UK Edition
America’s top tier credit ratings could be downgraded as the government edges ever closer to running out of money.
Fitch Ratings, one of the three biggest ratings agencies in the world, has placed the US’s “AAA” status on negative watch because of “brinkmanship over the debt ceiling” and the failures of the Biden administration to address growing debt burden risks.
Treasury Secretary Janet Yellen has warned the federal government could run out of money as soon as June 1, risking a first ever missed payment on US debts.
Fitch warned: “We believe risks have risen that the debt limit will not be raised or suspended before the x-date [when the government expects to run out of money] and consequently that the government could begin to miss payments on some of its obligations.”
It added: “The brinkmanship over the debt ceiling, failure of the US authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits, and a growing debt burden signal downside risks to US creditworthiness.”
A credit rating downgrade from Fitch would make it more expensive for the US government to borrow. It would also send shockwaves through the global financial system given many investors hold US government bonds as a near gold-plated safe investment.
Ms Yellen has warned that the Treasury’s borrowing costs have already jumped significantly for securities maturing in early June.
She said in a letter this week: “If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests.”
The US hit its $31.3 trillion debt limit in January, meaning the administration is now only able to spend what it receives in tax and its cash reserves.
President Joe Biden and Republican lawmakers have been locked in talks about raising the so-called debt ceiling to allow the government to borrow more. However, talks have reached an impasse and investors are growing increasingly concerned about the risk of a possible default.
A failure to reach a deal “would be unlikely to be consistent” with the US’s AAA rating, Fitch said.
The US could also be downgraded if President Biden raised the debt ceiling using the 14th amendment, which some Democrats have called for. The amendment states that US debt shall not be questioned, a clause some have argued means the President can disregard the debt ceiling.
“Avoiding default by non-conventional means such as minting a trillion-dollar coin or invoking the 14th amendment is unlikely to be consistent with a 'AAA' rating and could also be subject to legal challenges,” Fitch said.
The debt ceiling has been raised more than 100 times since it was first set in 1917, but any increase must be passed through the House, which has a Republican majority. The Republicans are trying to leverage the deadline to push President Joe Biden to agree to spending cuts.
In a letter to the Republican House Speaker Kevin McCarthy earlier this week, Ms Yellen said again that the money will run out “potentially as early as June 1”.
Fitch said that it still expects a resolution to the debt ceiling deadlock before the deadline and argued there was a “very low probability” that the US would fail to make full and timely payments on its debt.