Fitch warns of possible credit downgrade with debt limit freeze

“The impasse over the debt ceiling, the failure of U.S. authorities to meaningfully address medium-term fiscal challenges that will lead to growing budget deficits and a growing debt burden signal risks to the downside for US solvency,” Fitch said.

Treasuries are the bedrock of the global financial system, and a Fitch downgrade – which would mark only the second time a ratings service has knocked US bonds from prime status – could drive up borrowing costs on everything from municipal debt to credit cards.

Biden administration officials warn that the protracted battle over the debt ceiling puts the United States at risk of losing its best credit rating. S&P downgraded the US credit rating in 2011, days after President Barack Obama and Republican leaders agreed to lift the debt ceiling while securing spending cuts. This further strained the economy as it struggled to recover from the global financial crisis.

Treasury Secretary Janet Yellen warned on Wednesday that the United States was “almost certain” to reach the X date in early June.

While House Speaker Kevin McCarthy (R-Calif.) Said GOP leaders and the White House had made progress in negotiations to tie federal spending cuts to an increase in the debt ceiling , lawmakers were allowed to return to their districts for Memorial Day weekend – a sign that no deal is imminent.

While Fitch said he still expects policymakers to resolve their differences before Date X, a growing number of challenges have complicated his view of the United States’ ability to manage its finances.

“The disputed 2020 presidential election, the debt limit to advance political agendas, and the failure to reach consensus on the country’s fiscal challenges are recent signs of deterioration,” the company wrote.

Possible solutions proposed by some Democrats – including minting a trillion-dollar coin or invoking the 14th Amendment – are ‘unlikely to be consistent’ with Fitch’s current ‘AAA’ rating for US sovereign debt, according to the release.

The service also signaled that the United States would likely lose its top rating if, in the absence of a deal, the Treasury prioritized payments on the public debt over its other obligations.