Quantitative Easing

US “AAA” rating could come under pressure from debt limitation: Fitch

Dive brief:

  • Fitch Ratings has warned of congressional partisanship that preventing an increase in the US debt ceiling could lead to delays in federal payments and an erosion of the country’s “AAA” rating.
  • “Fitch believes the debt limit will be raised or suspended in time to avoid an event of default, but if this was not done in a timely manner, a political deadlock and reduced funding flexibility could increase the risk of a US sovereign default, ”the agency said. “Prioritizing debt payments, assuming it is an option, would lead to non-payment or delayed payment of other obligations, which would likely undermine the ‘AAA’ status of the United States. “
  • Treasury Secretary Janet Yellen told the Senate Banking Committee on Tuesday that the failure of lawmakers to raise the US debt ceiling would be “a self-inflicted injury of enormous proportions,” plunging the United States into crisis. recession, undermining confidence in the dollar and increasing borrowing costs. for years.

Dive overview:

Senate Minority Leader Mitch McConnell (R-Ky.) On Monday showed no signs of changing his view that Democrats must act to raise the debt limit without help from Republicans. The stalemate has raised concerns that the United States could default on its debt for the first time in history.

The Treasury, unable to borrow since August 1, will likely run out of cash available to pay US bills by October 18, Yellen said Tuesday in a letter warning congressional leaders on both sides of the costs of simply delaying an increase in the debt ceiling.

“We know from previous deadlocks around debt limits that waiting until the last minute can seriously damage business and consumer confidence, increase borrowing costs for taxpayers, and have a negative impact on US credit rating for years to come, ”Yellen said.

Fitch also warned of the costs of postponing an increase in the debt ceiling, including any plans by the Treasury and the Federal Reserve to prioritize interest and debt repayments.

“The economic impact of debt prioritization and the potential damage to investor confidence in the full confidence and credit of the United States (which allows its ‘AAA’ rating to tolerate such high public debt) may not not be compatible with an “AAA” rating, “says Fitch.

McConnell declined to rally Republicans on Democrats’ efforts to raise the debt ceiling, saying an increase would allow even more overspending by Biden and Democrat-controlled Congress. Senate Republicans twice last week blocked Democrats’ efforts to raise the US debt limit.

“Even now, when Americans already face painful inflation, Democrats are preparing another tax and spending spree without any Republican contributions or support,” McConnell wrote on Monday. in a letter to Biden. “For two and a half months, we have simply warned that since your party wants to govern alone, it must also manage the debt ceiling alone. “

After reading McConnell’s letter, Biden told a press conference on Monday that Republicans were shirking their responsibility to help manage a federal debt that grew by nearly $ 8 trillion when they were in control. Congress and the White House during the Trump administration.

“Raising the debt limit is usually a two-party business, and it should be,” Biden said. “We need to raise the debt ceiling, in part because of the fiscal and reckless spending policies of the previous Trump administration. “

Failure to raise the debt ceiling “will jeopardize the safety of US Treasury securities and threaten the reserve status of the dollar,” Biden said. “America’s credit rating will be lowered – interest rates will go up on mortgages, auto loans and credit cards. “

Biden said he could not guarantee that the United States would not exceed the debt limit. “If I could, I would, but I can’t,” he said. “It’s up to Mitch McConnell to decide.”

McConnell and his Senate minority have refused to allow Democrats to use their slim majority to raise the debt limit, insisting they are using a complicated and protracted budget process known as reconciliation.

“We don’t have time to delay the elaborate procedural schemes that the Republicans’ proposals require – dozens of unsure votes, many of which have nothing to do with the debt limit,” Biden said.

Months before the current partisan deadlock, investors seeking safety in times of market turmoil have shown less eagerness to buy US Treasury debt, according to the Institute of International Finance (IIF).

“For a few scary days in early March 2020 – at the height of the first wave of COVID-19 – US Treasuries stopped trading as a safe-haven asset, with a 10-year yield rising as the [Standard & Poor’s 500 Index] was tumbling down “, IIF said in a report.

“Over the next few weeks, it took $ 1.5 trillion in emergency QE [quantitative easing] by the Federal Reserve to stabilize the market, in what has now been termed a “plumbing” episode of the market, ”the institute said. “But this episode has a lot in common with a number of EM [emerging market] crises: lever to boost carrying; a significant and unexpected shock; and cash that evaporates when it’s needed most.

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