The US credit rating is at risk of a downgrade amid the debt ceiling ‘brinkmanship’

Credit rating agency Fitch has put the United States’ No. 1 credit rating on watch for a potential credit rating downgrade, as talks to resolve a looming financial crisis dragged on without reaching an agreement nearly a week before a possible default.

Fitch said in a statement on Wednesday evening that the move reflects “increasing political partisanship blocking a resolution” on the debt ceiling. While Fitch still expected an agreement, it said the risk had increased that the government could miss some of its obligations.

“The policy of brinkmanship with regard to the debt ceiling, and the failure of the US authorities to meaningfully address the fiscal challenges in the medium term that will lead to an increase in the budget deficit and a growing debt burden, indicate negative risks to the creditworthiness of the United States,” it said.

Fitch’s warning came after the White House and Republican negotiators met in the final round of talks to hammer out an agreement that would raise the country’s borrowing limit before it runs out of cash to pay all its bills as early as June 1.

The US Treasury Department said in response that the warning “underscores the need for swift, bipartisan action by Congress to raise or suspend the debt limit and avoid an artificial crisis” for the economy.

“like [US Treasury secretary Janet] Yellen has been warning for months that brinksmanship over the debt limit is doing serious harm to American businesses and households, increasing short-term borrowing costs for taxpayers and threatening the credit rating of the United States,” a Treasury spokesperson said.

But Kevin McCarthy, the Republican Speaker of the House, said investors have nothing to fear from a deadlock.

“We’re working day and night. I wouldn’t, if I were in the markets . . . be afraid of anything in the process. I wouldn’t be afraid of the markets in any way shape or form,” McCarthy told Fox Business. “We will make a deal when we get it, befitting the American public, and there should be no fear.”

Earlier in the day, Yellen reiterated her prediction that June 1 is the critical deadline. Speaking at an event with the Wall Street Journal, she said the uncertainty about the debt ceiling is already causing “some stress in the financial markets,” adding that Treasury bills due in early to mid-June are “trading at . . . much higher rates.”

Investors were avoiding bonds due in early June, which sent the prices of those securities down dramatically. In early May, the Treasury Department had to auction off a four-week note with the highest yield ever to entice buyers.

The pressure is not limited to the debt market. Stocks have fallen this week, with blue-chip S&P 500 and heavyweight Nasdaq Composite both down 2 percent.

“I think that should be a reminder of the importance of reaching an agreement in a timely manner,” Yellen said, warning that there could be “significant malaise in the financial market” even in the run-up to a final agreement.

McCarthy gave only a slightly improved assessment of the talks on Wednesday afternoon, saying they had gone “a little better” but that there was still a gap in spending levels. Republicans have demanded deep cuts to discretionary spending, while the White House has proposed freezing spending at current levels next year.

The White House has not commented on the outcome of Wednesday’s talks, but Karen Jean-Pierre, the press secretary, told reporters earlier that President Joe Biden remains hopeful of a bipartisan deal.

In the absence of an agreement, the House told lawmakers they could return to their districts this coming Memorial Day weekend, but warned them that they should be ready to return to Washington on short notice.

McCarthy said the House will need 72 hours to review the legislation before a vote, after which it will move to the Senate. Although Senate leaders may try to rush legislation, it is becoming increasingly difficult to enact any law by June 1, the first potential day of default.

McCarthy sat down with Biden on Monday for talks the two leaders described as “productive,” after the president cut short his foreign trip after the G7 meeting to be in Washington for debt ceiling negotiations. But they have not yet scheduled another in-person meeting.

Both Biden and McCarthy are under increasing pressure from the left and right sides of their parties, respectively, to reject calls for compromise.

The more hawkish members of McCarthy’s conference dismissed concerns about default and suggested that the Treasury could simply prioritize debt repayment.

But Yellen dismissed those claims on Wednesday: “Our payment systems were built in order to pay our bills, not to decide which bills to pay and which bills not to pay.”

“Generally speaking, prioritization is not really something that’s feasible,” she added.