U.S.’s AAA at Risk If Congress Fails on Debt Limit, Fitch Says

(Bloomberg) -- The U.S.’s AAA sovereign rating could be at risk if Congress fails to raise the federal debt limit, forcing the Treasury into a payments default, according to Fitch Ratings.

In an echo of the turmoil of the 2011 debt-limit showdown -- when S&P Global Ratings downgraded the U.S. from AAA, roiling global financial markets for a time -- Fitch said Friday that delayed or defaulted payments by the Treasury, even on items other than Treasury securities, “would likely undermine the U.S.’s ‘AAA’ status.”

Fitch, which has had a “negative outlook” on the sovereign AAA U.S. rating since July 2020, underscored that it “believes that the debt limit will be raised or suspended in time to avert a default event.”

“But if this were not done in a timely manner, political brinkmanship and reduced financing flexibility could increase the risk of a U.S. sovereign default,” Fitch said.

The warning comes ahead of the latest attempt by congressional Democrats to suspend the federal debt limit, which kicked back in at the start of August. Senate Majority Leader Chuck Schumer plans to seek a vote as soon as early next week on the debt-limit suspension bill the House passed on Wednesday.

GOP Strategy

Republicans are likely to block that vote, as they did with legislation on Monday, when Democrats attached a debt-ceiling suspension to a stopgap spending bill.

GOP lawmakers have argued that Democrats should use the so-called reconciliation route to increase the debt limit. That’s the parliamentary procedure that bypasses a filibuster, which Democrats used to enact the $1.9 trillion pandemic-relief bill in March and are currently using to advance an up-to-$3.5 trillion social spending package.

That route, however, could potentially take two weeks or so and require multiple, lengthy rounds of votes on politically charged amendments.

Democratic congressional leaders are pushing Republican senators to avoid blocking a vote on a simple bill to suspend the debt limit until December 2022.

Treasury Secretary Janet Yellen has warned the Treasury could run out of cash as around Oct. 18. In that case, it would need to decide whether to prioritize payments on Treasuries over other federal obligations. While the Treasury has said it won’t engage in prioritization, many in the bond market anticipate that that would happen.

Fitch underscored its view that prioritization may not be enough to sustain full confidence in the current, top rating for the U.S.

“The economic impact of debt prioritization and the potential damage to investor confidence in the full faith and credit of the U.S. (which enables its ‘AAA’ rating to tolerate such high public debt) may not be compatible with an ‘AAA’ rating,” Fitch said in its release Friday.

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