The U.S. debt crisis is increasingly being felt in the markets. Interest rates, stock prices and other securities move conditioned by the risk that the Treasury will not be able to meet all its obligations at the beginning of June. The doubts are transferred to the rating agencies. In the twin crisis of 2011, Standard & Poor's withdrew the maximum credit rating from the United States. Now it is Fitch, another of the big three, which has put the top rating under review, as announced on Wednesday.
The negotiations are still not finished and the countdown is moving forward. No one knows for sure when the United States might run out of money to pay all the bills. Yellen has communicated in a letter to Congress that it is highly likely that this will happen in early June and "potentially as early as June 1," although leaving the door open for the so-called date X (when the Treasury exhausts its treasury position and its ability to adopt extraordinary measures without incurring new debt) to come later.
This Wednesday Yellen has indicated that if that moment came it would not be easy to prioritize some expenses and bills over others, because the system is not designed for it. Analysts believe that the most damaging thing for the economy would be to stop paying any interest payments or maturing public debt, but Yellen can maneuver and avoid it. That is, you can exceed date X, breach some obligations and not default on debt issues.
In any case, as the date approaches, the risks increase. This Wednesday Kevin McCarthy, speaker of the House of Representatives, has been convinced that there will be an agreement, but at the same time he has blamed President Joe Biden, for the possibility that there will not be.
In this context, Fitch Ratings has placed the "AAA" credit rating of the United States on negative watch. The decision, as explained by the agency in a statement, reflects the increase in political partisanship that is preventing reaching a resolution to raise or suspend the debt limit despite the proximity of date X. Fitch is still waiting for a resolution on the debt limit before that date. However, it considers that the risks have increased that this will not be the case and, as a result, that the Government may start to default on some of its obligations.
"Tensions around the debt ceiling, the failure of the U.S. authorities to meaningfully address medium-term fiscal challenges, which will lead to widening budget deficits and a rising debt burden, point to downside risks to U.S. creditworthiness." explains the agency in a statement.
The United States reached its debt limit of 31.381 trillion dollars on January 19. The Treasury began to take extraordinary measures to avoid exceeding the ceiling, but the margin is exhausted. The Treasury's cash balance reached $76.500 billion on May 23 and major payments are due on June 1 and 2, the first high-risk dates.
Prioritizing payments to debt securities over other bills would prevent a default in financial terms, but does not seem appropriate for an AAA rating. Similarly, avoiding default by unconventional means such as minting a trillion-dollar coin or invoking the 14th amendment is unlikely to be consistent with the top rating and could also be subject to legal challenges, Fitch explains.
"We believe that default on full and on-time payments on debt securities is less likely than reaching date X and is a very low probability event." Such non-compliance would lead to downgrading the rating to Restricted Default (RD). The affected debt securities would be downgraded to D, default, default. In addition, other long-term debt securities maturing within 30 days would likely be downgraded to CCC, and short-term Treasury bills maturing within 30 days would likely be downgraded to C, junk bond ratings.
Other debt securities maturing more than 30 days would likely be downgraded to the post-default rating and Fitch is targeting a possible AA- rating, three notches below the maximum. "Fitch would expect any debt default to be relatively brief. However, a longer default scenario could have more serious implications for the country's rating following the default."
In 2011, with Barack Obama as president, a parliamentary agreement with spending cuts saved the United States from default, with 72 hours left before the money ran out. Along the way, Obama left himself political credit and the rating agency Standard & Poor's stripped the Treasury of its AAA rating. In the midst of the European debt crisis, there were shocks in the markets and damage to the economy. In 2013, Obama refused to negotiate, and Congress ended up raising the debt ceiling without conditions.
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