Fitch has placed the country’s “AAA” rating on negative watch, ahead of a possible downgrade if lawmakers fail to increase the amount the Treasury can borrow before it runs out of money.
In 2011, during lengthy debt ceiling negotiations, Standard & Poor’s downgraded the US credit rating, but Fitch did not.
“It’s not entirely surprising given the mess in the debt ceiling negotiations,” said Tony Sycamore, an analyst at IG Markets in Sydney, Australia.
President Joe Biden’s administration and Republicans in Congress are deadlocked on raising the federal debt ceiling by $31.4 trillion, with both sides deeming the other’s proposals grossly exaggerated.
In its statement, Fitch confirmed that it is “awaiting” the right decision from the United States at the right time, but experts nevertheless believe that there is “a high risk that the debt ceiling will not be raised. or suspended in due course”. way, and that the government will start not making certain payments. »
She also warned that “the absence of an agreement (…) would be a negative sign in terms of governance in general and the will of the United States to fulfill its obligations within the time limits”.
Fitch said the country’s rating could be downgraded if the United States does not raise or suspend the debt limit in a timely manner.
And the agency confirmed that it would closely monitor developments in the state of the US public debt ceiling, noting that if the US did not pay debts due by June 1 or 2, it would be considered as defaulters, and subsequent debts due within 30 days would become “extremely risky”, meaning the debt rating will be CCC.
As for the rest of the debt, Fitch said its rating would remain unchanged, as the United States has the largest reserves of funds in the world.
A “rating watch” indicates that there is an increased possibility of a rating upgrade, and differs from a “look at the outlook” which indicates the direction in which the rating is likely to move over a period of time. one or two years.
What happened in 2011?
After a difficult working process, Congress approved at the last minute, more precisely on August 2, 2011, an agreement to raise the public debt ceiling by $2.1 trillion, allowing the US Treasury to meet its payments until 2013 and cut spending by $2.4 trillion in two steps over ten years.
However, this agreement did not avoid a downgrading of the sovereign rating of the United States. On August 5, 2011, the rating agency Standard & Poor’s lowered the long-term credit rating of the United States from excellent (AAA) to (AA+), for the first time in the history of the United States, due to concerns about the government’s worsening budget deficit and indebtedness, considering that this agreement is not enough, and it is a very important step that can have serious repercussions on the world economy and on the foreign investments, in particular on US Treasury bonds.
And since U.S. Treasury bonds have been considered among the safest, fixed-return forms of investment over the past three decades, nearly every wealthy country and central bank in the world has invested hundreds of billions in these bonds. , which have never been in doubt.
In addition to investments from advanced industrial countries, such as Britain, Germany, France and Japan, emerging countries, such as China, Brazil, Russia and oil-exporting countries, have also joined the list of investors in US Treasury bonds, in an intensive manner.
Hence the danger of lowering the sovereign rating of the United States of America or its inability to repay these loans. Because it will affect all the active economies of the world, which prompted the former director of the International Monetary Fund, Christine Lagarde, to describe this development as a “very, very dangerous event”.
As for the Chinese People’s Official Daily, after the downgrade, it voiced Beijing’s positions in this regard, saying, “Washington’s handling of the debt crisis is irresponsible and immoral. The newspaper accused US politicians of sacrificing the interests of other peoples for the benefit of a handful of votes, while Vladimir Putin, the Russian president, declared that Washington was encroaching on the world economy and living on debt, not on its economic capacities.
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