Photo/VCG211316808072

On March 24, one of the world's top rating agencies, Fitch Ratings, has placed the the United States' AAA long-term foreign currency issuer default rating on Rating Watch Negative, stating that it may downgrade the country's sovereign credit rating to reflect the deterioration of its political deadlock.

This comes as the Republicans and Democrats negotiate over the US debt ceiling, but so far, no agreement has been reached. The Rating Watch Negative reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching x date, when the U.S. Treasury exhausts its cash position and capacity for extraordinary measures without incurring new debt. 

The cash balance of the Treasury reached USD76.5 billion as of May 23 and sizeable payments are due June 1-2, meaning that the x-date could arrive as the Treasury indicated and before an agreement is reached or finalized with votes in the House and Senate.

In the email sent to National Business Daily, Fitch Ratings still expects a resolution to the debt limit before the x-date. However, it also stated it believes 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. 

According to Bloomberg, House speaker Kevin McCarthy is optimistic that White House and GOP negotiators would reach a deal in time to avert a potentially catastrophic default. The California Republican said this after a four-hour meeting between his and President Joe Biden’s hand-picked negotiators that a deal was possible before June 1, the date by which Treasury Secretary Janet Yellen has warned the US could run out of money to pay its bills.

Fitch Ratings also pointed out that the brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness.

According to the rating agency, a key consideration in determining the U.S. post-default rating would be the Sovereign Rating Model (SRM) - the details of which are in the public domain. The SRM output for the U.S. stands at 'AA+'. The model applies a two-notch reduction for a sovereign that has recently defaulted, suggesting that Fitch's model-implied post-default rating would be "AA-".