March 15, 2017 / 1:28 PM / 6 months ago

Fitch: U.S. Debt Ceiling Crisis Appears Less Likely in 2017

(The following statement was released by the rating agency) NEW YORK/LONDON, March 15 (Fitch) The U.S. Congress is likely to vote in a timely fashion to suspend or raise the federal debt limit, Fitch Ratings says, as both Congress and the presidency now are under Republican control. The ceiling on U.S. federal debt is slated to be re-imposed at just below $20 trillion tomorrow, having been suspended since November 2015. After the re-imposition of the ceiling the Treasury cannot add to the debt stock, but can continue to rely on "extraordinary measures". The Congressional Budget Office estimates that the government could finance itself until "some time this fall". No Treasury estimate is yet available. Fitch has previously made it clear that reaching the so-called "x date", when the Treasury's scope for extraordinary measures runs out, without raising the debt ceiling, is a negative U.S. sovereign rating trigger. This is because of the tail risk of a missed debt service payment, the possible effect on investor confidence in the world's largest bond market and the damage to our assessment of fiscal governance. The last time the decision to raise or suspend the debt ceiling came down to the wire was on October 16, 2013, the day before the "x date". On October 15, Fitch had placed the 'AAA' sovereign rating of the U.S. on Rating Watch Negative to reflect the increased risk of a sovereign bond payment default and the potential for delays to payments to suppliers and employees, as well as social security payments to citizens. All of these factors would have damaged our assessment of U.S. sovereign creditworthiness. We resolved the Rating Watch after the debt ceiling was suspended the following February. Uncertainty caused investors to shun bonds maturing around the "x date" in 2013, disrupted the Treasury's regular schedule of debt issuance, and led to higher interest costs, according to the Government Accountability Office (GAO). But this has not undermined the U.S. dollar's reserve currency status, a key support to the country's rating. Opponents of a higher debt ceiling form a sizeable part of the Republican House majority. The current suspension of the debt ceiling, passed as part of the 2015 Bipartisan Budget Act (BBA) six days before the Treasury's estimated "x date", relied on Democrat votes, and a majority of Republicans ignored the Speaker's call to support it. However, we think Republican control of both branches of government makes it more likely that Congress will vote to raise or suspend the debt ceiling in a timely fashion. For Republicans, resistance would draw the ire of a Republican president and could be unpopular with the electorate. Democrat leaders have indicated that they would vote for a "clean" debt ceiling increase that does not contain other policy riders. The vote could be attached to a "must-pass" bill prior to the "x-date" such as the appropriations bill for the second half of FY17. While it appears less likely that the "x date" is reached without a debt ceiling increase or suspension, the risk could re-emerge in the future. It has not been demonstrated that the government can operationally or legally prioritise debt service, and any decision to do so would be taken by the president. A House Financial Services Committee investigation in 2016 produced evidence that the Treasury and the New York branch of the Federal Reserve had discussed contingency plans for ensuring debt service after the "x date". But the Treasury's testimony emphasized operational risks to timely debt service under this scenario and has stressed that timely raising of the debt ceiling would be the only viable option. It has reiterated its commitment to servicing U.S. federal debt on time and in full. The ability to prioritize debt service could make not raising or suspending the debt ceiling politically more palatable. In an echo of previous House votes, House Representative McClintock introduced a bill in January to prioritize debt service and social security payments after debt had reached the statutory limit, although amid a crowded legislative agenda, the bill is unlikely to become law. Prioritizing debt service after extraordinary measures were exhausted implies that the U.S. government could fall behind on contractual obligations to employees, pensioners and suppliers. Failure to honor non-debt service obligations would not be a default under Fitch's Sovereign Rating Criteria. However it would indicate payment distress and policy dysfunction, and could have a detrimental impact on the economy and future financing terms. In this scenario, Fitch would review the U.S. sovereign rating, and may judge these developments to be incompatible with AAA status. Contact:: Charles Seville Senior Director, Sovereigns +1 212 908 0277 Fitch Ratings, Inc. 33 Whitehall Street New York, NY Ed Parker Managing Director, Sovereigns +44 203 530 1176 James McCormack Managing Director, Sovereigns +44 203 530 1286 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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