The US debt crisis is making itself felt more and more in the markets. Interest rates, stock prices and other titles move conditioned by the risk that the Treasury will not be able to meet all its obligations at the beginning of June. Doubts are transferred to the rating agencies. In the twin crisis of 2011, Standard & Poor’s withdrew the US’s top credit rating. Now it is Fitch, another of the big three, which has put the highest grade under review, as announced this Wednesday.
Negotiations are still not over and the countdown is on. No one knows for sure when the United States might run out of money to pay all the bills. Yellen has communicated by letter to Congress that it is highly likely that this will happen in early June and “potentially as soon as June 1”, although leaving the door open for the so-called X date (when the Treasury exhausts its treasury position and its ability to take extraordinary measures without incurring new debt) come later.
This Wednesday Yellen pointed out that if that moment came it would not be easy to prioritize some expenses and invoices over others, because the system is not designed for it. Analysts believe that the most damaging thing for the economy would be to miss an interest payment or public debt maturity, but Yellen can maneuver and avoid it. In other words, date X can be exceeded, some obligations not fulfilled and debt issues not defaulted.
In any case, as the date approaches, the risks increase. This Wednesday Kevin McCarthy, president 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 he does not have one.
In this context, Fitch Ratings has placed the United States’ AAA credit rating on negative watch. The decision, as explained by the agency in a statement, reflects the increase in political partisanship that is preventing a resolution to raise or suspend the debt limit being reached despite the proximity of date X. Fitch is still waiting for a resolution on the limit debt before that date. However, it considers that the risks that this is not the case have increased and, consequently, that the Government may begin to default on some of its obligations.
high risk dates
“Tensions around the debt ceiling, the failure of the US authorities to meaningfully address medium-term fiscal challenges, which will lead to widening budget deficits and a growing debt burden, signal risks to the decline for the credit solvency of the United States ”, explains the agency in a statement.
The United States reached its debt limit of 31.381 trillion dollars on January 19. The Treasury began taking extraordinary measures to avoid breaching the ceiling, but the margin is drying up. The Treasury’s cash balance reached $76.5 billion on May 23 and major payments are due June 1 and 2, the first high-risk dates.
Prioritizing payments on debt securities over other bills would avoid a default in financial terms, but does not seem appropriate for a 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 defaulting on timely and full payments on debt securities is less likely than making X date and is a very low probability event.” Such a default would lead to a downgrade to Restricted Default (RD). The affected debt securities would be reduced to D, default, non-payment. In addition, other long-term debt securities due within 30 days would likely be downgraded to CCC, and short-term Treasury bills due within 30 days would likely be downgraded to C, junk bond ratings.
Other debt securities with maturities greater than 30 days would likely be downgraded to post-default, and Fitch points to a possible AA- rating, three notches below the maximum. “Fitch would expect any debt defaults to be relatively short-lived. However, a longer default scenario could have more serious implications for the country’s post-default rating,” he adds.
In 2011, with Barack Obama as president, a congressional agreement with spending cuts saved the United States from default, with 72 hours left until the money ran out. Along the way, Obama earned political credit and the ratings agency Standard & Poor’s withdrew its AAA rating on the Treasury. 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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