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Top Rating Agencies Threaten U.S. With Credit Downgrade Over Debt Limit Chaos, Even If A Deal Is Made

  Two rating agencies placed the United States on a negative watch over recent negotiations to amend the   debt ceiling   between President ...

 Two rating agencies placed the United States on a negative watch over recent negotiations to amend the debt ceiling between President Joe Biden and House Speaker Kevin McCarthy.

The debt ceiling, a statute established by Congress that prevents the government from spending beyond a predetermined national debt limit of $31.4 trillion, exceeded the threshold earlier this year. Republicans want to link an increase in the debt limit with spending caps, while Democrats say they prefer separate processes for debt limit negotiations and budget reforms, a debate which occurs even as the government nears default as soon as June 1.

Fitch Ratings, considered one of the three most influential credit rating agencies in the nation, said in an outlook on Wednesday that the AAA rating currently held by the U.S. could be reconsidered because of “increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit.” The firm, which nevertheless anticipates that the debt ceiling will be amended before the estimated deadline, added that persistent failures to “meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden” also have negative implications for creditworthiness.

“The absence of a medium-term fiscal framework and a complex budgeting process has contributed to the failure to reverse successive debt increases caused by economic shocks and other fiscal accommodations,” the firm added. “Political partisanship has brought about repeated debt-limit brinkmanship and led to near-default episodes that could erode confidence in the government’s repayment capacity.”

Fitch also noted that unconventional mechanisms cited by Democrats to address the fiscal instability, such as minting a trillion-dollar platinum coin or invoking the Fourteenth Amendment to declare the debt limit unconstitutional, are “unlikely to be consistent” with a AAA rating. The company had issued a negative outlook two years ago over the rising national debt.

DBRS Morningstar, another credit rating agency, issued a similar outlook and added that “the prospect of repeated debt ceiling standoffs in a polarized political environment” could lead to a decision that the nation is no longer worthy of a AAA rating “even if Congress ends up increasing the debt ceiling” before June 1.

 Both firms acknowledged that the U.S. remains highly resilient relative to other developed economies, rendering the nation a global bellwether with respect to reserve currency status and government bonds widely considered to be safe-haven assets. The national debt, on the other hand, now surpasses $31.7 trillion and serves as a continual damper on economic growth, while elevated interest rates have weighed on the budget as lawmakers are forced to devote more revenues toward servicing the debt rather than spending on federal programs.

Democratic officials have likewise contended that Republicans are engaged in brinkmanship as they call for spending reforms in addition to a temporary increase in the debt limit. House Republicans passed legislation that freezes spending at fiscal year 2022 levels with 1% annual increases for the next decade and establishes an increased debt limit.

McCarthy asked fellow Republicans in a closed-door meeting earlier this week to “hang with me on the debt limit” since he and Biden are “nowhere near a deal yet” with respect to spending. Biden had characterized the most recent discussions as “productive” and affirmed that “the only way to move forward is in good faith toward a bipartisan agreement.”

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