Fitch Says US Sovereign Rating Pressured by Debt Limit Brinkmanship

Fitch Ratings said Friday the United States' AAA sovereign credit rating could be pressured if federal lawmakers fail to address the debt ceiling in a timely manner, noting that political brinkmanship and reduced financing flexibility could increase the risk of a default.

A two-year suspension of the debt ceiling expired in July, and Democrats and Republicans in Congress remain at odds. The credit rating agency said it believes action will be taken to raise or suspend the debt ceiling in time to avert a default. But it said the failure of the latest efforts to address the matter "indicates that the current stand-off could be among the most protracted since 2013."

U.S. Treasury Secretary Janet Yellen has warned that the government could run out of cash by October 18 if the debt ceiling is not raised or suspended, leading to its first-ever default.

"We view reaching the Treasury’s X-date [October 18] without the debt limit having been raised as the principal tail risk to the U.S. sovereign’s willingness and capacity to pay," Fitch said in a report. "If this appeared likely we would review the U.S. sovereign rating, with probable negative implications."

As for a default, Fitch said it "would downgrade only the affected instruments to a default rating level, while non-defaulted instruments that continued to perform would retain their then-current ratings."

It added that the United States would still have a limited capacity to make payments beyond October 18, but that would depend on "volatile revenue and expenditure flows" and that prioritization could reduce the immediate risk of a missed payment.

Fitch has had a negative outlook on the AAA rating since July 2020.