Fitch warns of possible credit downgrade with debt limit deadlock

Fitch Ratings has put the U.S. on notice for a potential credit downgrade as President Joe Biden and Republican lawmakers struggle to reach a deal to raise the debt limit.

“We believe risks have risen that the debt limit will not be raised or suspended before the X-date and consequently that the government could begin to miss payments on some of its obligations,” the ratings service said in a statement Wednesday.

The X-date is the day the U.S. government will be unable to pay all of its bills.

“The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness,” Fitch said.

Treasury securities are the bedrock of the global financial system, and a downgrade from Fitch — which would mark only the second time a ratings service has knocked U.S. bonds from top-tier status — could drive up borrowing costs on everything from municipal debt to credit cards.

Biden administration officials are warning that the protracted battle over the debt limit puts the U.S. at risk of losing its top credit rating. S&P lowered the U.S. credit rating in 2011, days after President Barack Obama and Republican leaders agreed to lift the debt ceiling while securing spending cuts. That further strained the economy as it fought to recover from the global financial crisis.

Treasury Secretary Janet Yellen on Wednesday warned that the U.S. was “almost certain” to reach the X-date in early June.

While House Speaker Kevin McCarthy (R-Calif.) said GOP leaders and the White House had made progress on negotiations to tie federal spending cuts to a debt limit increase, lawmakers were allowed to return to their districts for Memorial Day weekend — a sign that no deal is imminent.

While Fitch said it still expects policymakers to resolve their differences before the X-date, a growing number of challenges have complicated its view on the U.S.’s ability to manage its finances.

“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,” the company wrote.

Possible solutions floated by some Democrats – including minting a trillion-dollar coin or invoking the 14th amendment — are “unlikely to be consistent” with Fitch’s current "AAA" rating for U.S. sovereign debt, according to the statement.

The service also signaled that the U.S. would likely lose its top rating if, in the absence of a deal, Treasury prioritizes payments on government debt over its other obligations.