Fitch ratings places US AAA rating on 'negative watch' as debt ceiling deadline nears

NEW YORK - The credit rating agency Fitch Ratings announced Wednesday it has placed the US 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 US 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."

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, 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 US long-term foreign currency IDR to Restricted Default, followed by a series of downgradings on both long-term and short-term securities.

US governance is a weakness relative to peers with triple-A ratings. Recent signs of the deterioration in US 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 31.4 trillion US dollar 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 US government default on its debt obligations.

In 2021, Fitch joined S&P Global Ratings and warned that political brinkmanship over the US debt limit could damage the country's otherwise top-notch credit rating.

Fitch also holds a negative view on US fiscal outturns forecasting the US 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 US deficits above 7 percent of GDP on average, said Fitch.

In August 2011, S&P Global Ratings lowered the credit rating of long-term US government debt from AAA to AA+ amid a debt ceiling impasse at that time.