As negotiations over the nation’s debt ceiling approach their conclusion, the rating agency Fitch raised the stakes and increased market fears on Wednesday, May 24, by placing the United States’ credit on alert for a potential downgrade.
The rating agency claimed that the risks that the government would default on certain of its debts have increased due to the ongoing debt ceiling discussions. According to Fitch, failure to come to an agreement “would be a negative signal of the broader governance and willingness of the U.S. to honor its obligations in a timely fashion” and would not be compatible with a “AAA” rating.
It did, however, add that it anticipates a debt ceiling settlement before the x-date (when the U.S. Treasury exhausts its cash position and ability to take extraordinary measures without assuming further debt).
As per Fitch’s assessment, the U.S. hit its $31.4 trillion debt limitation on January 19, 2023, at which point the Treasury started taking unprecedented steps to prevent exceeding it.
According to the Treasury, these exceptional measures may run out as early as June 1, 2023.
Impact Of The Downgrade
Trillions of dollars worth of Treasury debt instruments might be priced differently due to a downgrading. Fitch’s action brought back memories of 2011, when S&P downgraded the United States to AA-plus, sparking a chain reaction that ultimately led to a stock market crash. As per CNBC reports, Fitch Ratings issued a similar warning about lowering the U.S. credit rating in 2013.
As investors continued to be cautious of risky assets owing to the blow a U.S. government default would deal to the world economy, stocks in Asia dipped on Thursday.
According to Fitch, the U.S. government will now run a deficit of 6.5% of the national GDP in 2023 and 6.9% in 2024 due to spending more than it receives.
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