US credit rating is at risk of downgrade amid “brinkmanship” on the debt ceiling

Fitch, the credit rating agency, has put the US’s triple-A rating on alert for a possible downgrade as talks to resolve a looming financial crisis stalled without a deal nearly a week ahead of a possible default.

In a statement Wednesday night, Fitch said the move reflected “increased political partisanship that prevents reaching a resolution” on the debt ceiling. While Fitch still expected a deal to be reached, it said the risk has increased that the government could miss payments on some of its obligations.

“Brinkmanship over the debt ceiling, failure of US authorities to address medium-term fiscal challenges that will lead to widening budget deficits and a rising debt burden signal downside risks to US creditworthiness,”[ads1]; it said.

Fitch’s warning came after the White House and Republican negotiators met for the latest round of talks to reach a deal that would raise the nation’s debt ceiling before it runs out of cash to pay all its bills as early as June 1.

But Kevin McCarthy, the Republican speaker of the House of Representatives, said investors had nothing to fear from the impasse.

– We work day and night. I wouldn’t, if I were in the markets. . . be afraid of anything in this process. I didn’t want to scare the markets in any way, says McCarthy to Fox Business. “We will reach an agreement when we get it, dignified by the American public, and there should be no fear.”

Janet Yellen, the US Treasury Secretary, had earlier in the day repeated her forecast that June 1 was the critical deadline. Speaking at an event with The Wall Street Journal, she said uncertainty over the debt ceiling was already causing “some stress in financial markets,” adding that Treasury bills maturing in early to mid-June “are trading at . . . significantly higher prices”.

Investors have shunned bonds maturing in early June, driving the price of those securities dramatically lower. In early May, the Treasury was forced to auction off four-week notes at the highest ever yield to lure buyers.

The stress is not limited to the debt market. Stocks have fallen this week, with the blue-chip S&P 500 and tech-heavy Nasdaq Composite both down nearly 2 percent.

“I think it should be a reminder of the importance of getting to a deal in time,” Yellen said, warning that there could be “significant distress in the financial markets” even ahead of a possible deal.

McCarthy gave only a slightly improved assessment of the talks on Wednesday afternoon, saying they had gone “a little bit better” but a gap remained in spending levels. Republicans have called for deep cuts in discretionary spending, while the White House has proposed freezing spending at existing levels next year.

The White House did not comment on the outcome of Wednesday’s talks, but Karine Jean-Pierre, the press secretary, told reporters earlier that President Joe Biden still hoped for a bipartisan deal.

In the absence of a deal, the House told lawmakers they could return to their districts for the upcoming Memorial Day weekend, but warned them they should be prepared to return to Washington on short notice.

McCarthy has said the House will need 72 hours to review the legislation before a vote, after which it will go to the Senate. Although Senate leaders could try to speed up the legislation, it has become increasingly difficult to pass a bill by June 1, the first possible day of default.

McCarthy sat down with Biden on Monday for talks the two leaders described as “productive,” after the president cut short an overseas trip to the G7 meetings to be in Washington for debt ceiling negotiations. But they have not yet scheduled another personal meeting.

Both Biden and McCarthy are under increasing pressure from the left and right respectively of their parties to reject demands for compromise.

The most hawkish members of McCarthy’s conference have brushed aside fears of default and suggested the Treasury could simply prioritize debt payments.

But Yellen rejected those claims on Wednesday: “Our payment systems are designed to pay our bills, not to decide which bills should be paid and which bills should not be paid.”

“As a general matter, prioritization is not really something that is operationally possible,” she added.

In a Brookings report, Wendy Edelberg, a senior fellow, warned of rising costs if market stress persists as the debt ceiling winds down.

Given the financial market’s reputation as the safest haven in the global financial system, the U.S. government has benefited from lower borrowing costs than other countries, which Edelberg said translated into interest savings of more than $750 billion over the next decade.

“If part of this benefit were lost by allowing the debt limit to bind, the cost to the taxpayer could be significant,” she wrote with her colleague Noadia Steinmetz-Silber.

They noted that premiums have already risen on debt maturing in June, and should that eventually extend to all maturities, interest costs to finance the federal debt could rise by more than $4tn.