US risks downgrade as debt ceiling ‘brinkmanship’ worries Fitch

Ratings agency highlighted governance as a weakness compared to ‘AAA’ peers

Ratings agency Fitch has put the US’ ‘AAA’ credit rating under threat as debt ceiling talks rumble on.

The firm has placed the US on ‘Rating Watch Negative’, citing concerns over political partisanship as a hindrance to efforts to reach a resolution to raise or suspend the debt limit.

While Fitch said it still expects a resolution to debt ceiling talks before the ‘x-date’, which secretary of the treasury Janet Yellen says could be as early as 1 June, the ratings agency believes the risk a solution may not be reached has increased and consequently the US could begin to miss payments on some of its obligations.

See also: Investors banking on last night’s Fed rate hike being the last

It also highlighted governance as a weakness compared to the US’ AAA-rated peers, with Fitch saying the “future direction” of the rating is “sensitive to the direction it takes”.

The firm added: “The contested 2020 presidential election, brinkmanship over the debt limit to advance political agendas, and failure to reach consensus on the country’s fiscal challenges are recent signs of the deterioration in governance.”

Fitch repeatedly said the failure to make payments on debt securities remains a “very low probability event”.

However, it stated that a failure would qualify as a debt default which would lead to a downgrade from ‘AAA’ to restricted default, while affected debt securities would be relegated to a ‘D’ rating.

Victoria Scholar, Interactive Investor head of investment, said: “In 2011, S&P cut the US rating to AA-plus, which triggered a major market sell-off.

“The Democrats and Republicans have yet to find common ground and reach a deal, with hopes that the stalemate will finally end in the days ahead so that a catastrophic US default can be averted. However time is ticking, prompting a bout of market nervousness as the deadline draws closer.”

Derren Nathan, Hargreaves Lansdown head of equity research, said the possible downgrade sparked a further increase in Treasury bill yields.

He said: “The prospect of the US government being unable to meet its financial obligations continues to be a key influence on investor sentiment in global equity markets.”

Comments by Republican House Speaker Kevin McCarthy that both sides of the negotiating table were ‘still far apart’ weighed on yesterday’s session on Wall Street. The S&P 500 lost 0.7% with broad based declines across most sectors.

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