DBRS Morningstar has put US sovereign debt under review with negative implications. The financial rating agency explains that the decision “reflects the risks of Congress failing to raise or suspend the debt ceiling in a timely manner.”
DBRS thus joins Fitch Ratings, which made the same decision on Tuesday at the end of the day.
“If Congress does not take action, the US federal government will not be able to pay all its obligations,” they explained, adding that the “exact timing” at which the federal government will exhaust available funds and the extraordinary actions, called “Date X’, is unclear.” “However,” Treasury Secretary Janet Yellen reiterated her warning on May 22 that X could arrive as early as June 1 “and they add that” based on the latest data on the daily flows of the public treasury into the bill We think it’s reasonable to assume that Date X will arrive in a matter of weeks, if not days.”
While the Canadian agency hopes that Congress can reach an agreement before Treasury resources run out, there is nonetheless a “risk of Congress inaction as a date approaches.” Any failed payment scenario by the US may result in a downgrade to a “selective default” rating.
This review returns to a deadlock between Democrats and Republicans, at a time when negotiations are taking place over the US debt ceiling between the White House, through President Joe Biden, and the “head” of the Republican majority in the House of Representatives, Kevin McCarthy. Although there is no resolution at the moment, both said progress is being made in this week’s talks.
What separates them is public spending. McCarthy has been pressing the White House to put in place cuts in federal budget spending that Biden calls “extreme.” The US president has already advocated new taxes on the rich – something Republicans reject.
Regarding the hypotheses that have been put on the table, that the Treasury Department prioritizes debt payments, over other programs funded by the federal government, the DBRS notes that such action, “over a prolonged period of time, could lead to a change classification, because Such a strategy would have a very negative impact on the economy and could quickly face legal and operational challenges.”
“In addition,” they continued with a political warning, “if the debt limit cannot be raised in a timely manner, this may indicate that political polarization is affecting the quality and predictability of American politics.”
They add: “Even if Congress can raise the debt ceiling before ‘date X’, the possibility of a ‘debt ceiling’ impasse in a polarized political environment may prompt DBRS Morningstar to consider credit risk in the United States to a level no longer compatible with a AAA rating.” The highest rating on the scale.
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