Credit Rating Agency Fitch Puts US AAA Rating On Watch. Here's What That Means

Credit bureau Fitch Ratings said the AAA rating of the U.S. — the highest available — is at risk because of the "brinkmanship over the debt ceiling," which is increasing the risk that the nation could default on some of its debt and other obligations. 

Late Wednesday, Fitch said it is moving the U.S. to "rating watch negative" due to the increasing risks that the nation will default, although it added that it "still expects a resolution to the debt limit before the x-date." The so-called x-date is the day when the Treasury will run out of money to pay its bills, and which Treasury Secretary Janet Yellen has estimated will arrive on June 1.

What does "rating watch negative" mean?

It means that Fitch is closely watching the negotiations over the debt ceiling and believes it may be necessary to downgrade the AAA rating currently held by U.S. debt.

"We believe risks have risen that the debt limit will not be raised or suspended before the x-date and consequently that the government could begin to miss payments on some of its obligations," Fitch wrote in the note. 

It added, "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."

Why does the AAA rating matter?

An AAA rating is the top assessment of a nation's creditworthiness, signaling that the country has the lowest expectation of defaulting. According to Fitch, an AAA rating is given "only in cases of exceptionally strong capacity for payment of financial commitments."

This matters because ratings influence investor expectations. With an AAA rating, investors are assured that there is low risk in buying bonds issued by that nation. But lower ratings signal a higher risk, which means nations with lower credit scores may need to pay higher interest rates to convince investors to buy their debt. That, in turn, increases a nation's cost of issuing debt.

What does the White House say?

"This is one more piece of evidence that default is not an option and all responsible lawmakers understand that. It reinforces the need for Congress to quickly pass a reasonable, bipartisan agreement to prevent default," a White House spokesperson said.

First published on May 25, 2023 / 8:18 AM

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