Rating agency Fitch has put the US triple-A rating on a possible downgrade as talks to resolve a looming financial crisis dragged on without an agreement being reached nearly a week before a possible default.
In a statement Wednesday night, Fitch said the move reflected “a rising political partisanship that is making a solution” to the debt ceiling more difficult. Although Fitch still expects an agreement to be reached, the risk has increased that the government could default on some of its commitments.
“The risky stance on the debt ceiling and the US authorities’ failure to meaningfully address medium-term fiscal challenges that will result in rising budget deficits and growing debt burdens signal downside risks to US creditworthiness,” it said.
Fitch’s warning came after White House and Republican negotiators met in the latest round of talks to reach an agreement that would raise the country’s borrowing limit before it runs out of money to pay all bills as early as June 1.
But Kevin McCarthy, Republican Speaker of the House, said investors had nothing to fear from the impasse.
“We work day and night. I wouldn’t do it if I was in the markets. . . do not be afraid of anything in this process. I wouldn’t scare the markets in any way,” McCarthy told Fox Business. “We will come to an agreement when we get it that is worthy of the American public and there should be no fear.”
Janet Yellen, the US Treasury Secretary, earlier in the day reiterated her forecast that June 1 was the crucial deadline. Speaking at an event with the Wall Street Journal, she said uncertainty about the debt ceiling was already causing “some stress in financial markets,” adding that Treasuries due in early to mid-June “at . . . significantly higher tariffs”.
Investors have avoided bonds maturing in early June, causing the price of these securities to fall dramatically. In early May, the Treasury was forced to auction four-week notes with their highest-ever yield to attract buyers.
The stress isn’t just limited to the debt market. Stock prices fell this week, with the blue-chip S&P 500 index and the tech-heavy Nasdaq Composite each down nearly 2 percent.
“I think this should be a reminder of how important it is to reach an agreement in good time,” Yellen said, warning that there could be “significant difficulties in the financial markets” even before an agreement could be reached.
McCarthy gave an only slightly improved assessment of the talks on Wednesday afternoon, saying they had been “slightly better” but there remained a gap in spending levels. Republicans have called for sharp cuts in discretionary spending, while the White House has proposed a spending freeze at existing levels next year.
The White House did not comment on the outcome of the talks Wednesday, but press secretary Karine Jean-Pierre previously told reporters that President Joe Biden was still hoping for a bipartisan agreement.
In the absence of an agreement, the House of Representatives told lawmakers they could return to their districts over the upcoming Memorial Day weekend, but warned them to be prepared to return to Washington at short notice.
McCarthy said the House of Representatives needs 72 hours to consider legislation before a vote, after which it will be sent to the Senate. While Senate leaders may try to rush legislation, getting a bill passed by June 1, the first possible day for a default, is becoming increasingly difficult.
McCarthy met with Biden on Monday for talks the two leaders described as “productive” after the president cut short a trip abroad to G7 meetings to attend debt ceiling negotiations in Washington. However, they have not agreed to meet again in person for the time being.
Both Biden and McCarthy are coming under increasing pressure from their parties’ left and right flanks, respectively, to reject demands for compromise.
The most dovish members of McCarthy’s conference have brushed aside fears of a default and suggested that the Treasury Department could simply prioritize debt service.
But Yellen denied those claims on Wednesday: “Our payment systems were designed to pay our bills, not to decide which bills we pay and which we don’t.”
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“In general, prioritization isn’t really operationally feasible,” she added.
In a Brookings report, senior fellow Wendy Edelberg warned of rising costs if market stress persists while the debt ceiling standoff drags on.
Given the Treasury market’s position as the safest haven in the global financial system, the US government has benefited from lower borrowing costs than other countries, which Edelberg says has translated into more than $750 billion in interest savings over the next decade.
“If some of that benefit were lost by pegging the debt limit, the cost to the taxpayer could be significant,” she wrote, along with colleague Noadia Steinmetz-Silber.
They noted that premiums on debt maturing in June have already risen. Should this eventually extend to all maturities, the interest cost of funding federal debt could increase by more than $4 trillion.