Economic Watch: U.S. credit downgrade could have dire impact-Xinhua

Economic Watch: U.S. credit downgrade could have dire impact

Source: Xinhua

Editor: huaxia

2023-05-26 21:03:15

by Matthew Rusling

WASHINGTON, May 26 (Xinhua) -- With a major rating firm warning of a U.S. credit downgrade, the impacts could be loss of international trust in the United States as a financial partner and an increased burden on taxpayers, experts said.

Major credit rating firm Fitch has warned the United States that it risks a credit downgrade, due to the possibility that lawmakers will fail to cut a deal on the nation's debt limit amid partisan fighting.

Fitch put the United States on "rating watch negative," warning of a downgrade from the sterling AAA rating if Congress does not pass a deal to raise the debt limit.

"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 in a statement on Wednesday.

"Fitch still expects a resolution to the debt limit before the X-date. However, we believe risks have risen that the debt limit will not be raised or suspended before the X-date," the statement said, referring to the June 1 default deadline maintained by Treasury Secretary Janet Yellen.

"The U.S. showdown over the debt ceiling runs the risk of a rating agency downgrade, especially if Congress were not to raise the debt ceiling by early June," Desmond Lachman, a senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua.

The consequence of a downgrade would be to raise the U.S. government's borrowing cost in the capital market, Lachman said.

"This would have consequences for the U.S. taxpayer," he said.

Fitch is one of the big three credit rating agencies, the others being Standard and Poor's (S&P) and Moody's.

The Fitch warning is "certainly very symbolic, and in a way it may force Moody's to follow suit," Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore, was quoted by Bloomberg as saying.

In 2011, the last time there was a major U.S. debt ceiling showdown, S&P removed for the first time the AAA rating that the United States had held for 70 years, downgrading U.S. government debt to AA+.

Uncertainty over the U.S. debt ceiling negotiations already sent yields on U.S. Treasury bills maturing in early June above 7 percent on Wednesday, reflecting investors' risk aversion to bonds maturing near the expected default date.

U.S. stocks extended losses on Wednesday as the debt ceiling deadlock continued, heightening worries of a catastrophic U.S. default.

Investors are worried, and stock markets are down while safe-haven assets are higher, said Kenny Fisher, senior market analyst at OANDA, a supplier of online multi-asset trading services.

Some experts said both sides of the Congressional aisle could feel the sting of public disapproval if there is a credit downgrade.

"A credit downgrade would damage Democrats and Republicans because of the inability of the two parties to negotiate an agreement," Brookings Institution Senior Fellow Darrell West told Xinhua.

"The reality is both are responsible and the public will probably blame both parties," West said.

West added that a credit downgrade would be terrible for the country. "It would signal a loss of trustworthiness and a fear that the United States is not a reliable financial partner."

Clay Ramsay, a senior research associate at the Center for International and Security Studies at the University of Maryland, told Xinhua that he thinks the risk of "default" is fifty-fifty.

Yellen on Wednesday reaffirmed early June as a debt ceiling default deadline, noting that the Treasury and President Joe Biden will face "very tough choices" if Congress doesn't act to raise the debt ceiling, as Washington runs out of money to pay interests on government bonds, government employees' salaries and federal contractors.

A Treasury Department statement said the Fitch announcement "underscores the need for swift bipartisan action by Congress to raise or suspend the debt limit and avoid a manufactured crisis for our economy."

The White House said Fitch's warning "reinforces the need for Congress to quickly pass a reasonable, bipartisan agreement to prevent default."

Members of Congress remain locked at an impasse, but the two sides seem to be making progress toward a compromise. Republicans want bigger spending cuts, and Biden said they still disagreed over where the cuts should fall.

Republican House Speaker Kevin McCarthy told reporters Thursday evening that the two sides had not reached a deal. "I don't think everybody is going to be happy at the end of the day."