U.S. AAA Rating At Risk of Being Cut Amid Debt Ceiling Crisis
America’s debt ceiling crisis just keeps on getting worse. International financial ratings agency Fitch Ratings Inc. has just announced that it may have to review the rating assigned to American debt, warning that the review may come with “potentially negative implications.”
Simply put, Fitch may have to slash the AAA credit rating it has assigned to U.S. federal treasury securities if the government doesn’t raise the federal debt ceiling.
Currently, the U.S. government enjoys the highest possible credit rating, AAA, making U.S. debt the safest bet for bondholders. However, the government has nearly approached its debt ceiling, meaning that the maximum debt that the government can issue has almost been reached.
If the debt ceiling is not raised, the government will be forced to default on some of its obligations—an event that would strip U.S. treasury securities of its safe-haven investment status. Consequently, the U.S. government will also be forced to shut down in the absence of funds to keep running its operations.
Fitch Ratings warns that if the debt ceiling is not raised, there will be a “potential damage to investor confidence in the full faith and credit of the US, which enables its ‘AAA’ rating to tolerate such high public debt.”
There remains a political divide as to whether the government should raise the debt ceiling. However, Treasury Secretary Steven Mnuchin and Senate Majority Leader Mitch McConnell have clearly indicated that the government may not have a choice but to raise the debt ceiling.
Meanwhile, Fitch Ratings also remains skeptical of the House budget proposal. “The latest Republican house budget resolution restates the aim of eliminating the budget deficit over 10 years, partly through some mandatory spending cuts,” said Fitch Ratings. “But it lacks detail, and assumes a 2.6% growth rate, which we view as optimistic over the medium term (we forecast 2.6% growth next year, slowing to 2.2% in 2019).”
There also remains significant uncertainty surrounding Trump’s tax reforms, which are also due to be finalized in the coming weeks. Fitch is assuming that the government will loosen its fiscal policy through tax cuts, which is in line with what the Trump administration has indicated.
Regardless, the deadline to make a final decision on raising the debt ceiling is set for mid-October, following which Fitch will be reviewing its rating for U.S. debt.
“Fitch: Debt Limit, Government Funding to Test US Policy Makers,” Fitch Ratings Inc., August 23, 2017.