It seems like everyone these days is expecting. No, not a baby, a debt ceiling deal.
But it's starting to look a little stormy out there.
Fitch Ratings agency announced tonight that it's putting US debt on rating watch negative, signaling that it could downgrade US debt if lawmakers do not agree on a bill that raises US Treasury's debt limit.
Still, even though markets are a little frazzled lately, they're signaling that they're still pretty confident lawmakers will avoid defaulting on US debt. President Joe Biden and House Speaker Kevin McCarthy say they're committed to avoiding default.
Since the United States was founded in 1776, the country has never not paid its bills on time (good luck trying to count how many people have said something along those lines in the past couple of weeks).
That said, there is still no concrete deal to raise the debt ceiling. And even if there were, it would still need House and Senate approval, which wouldn't necessarily happen at the snap of a finger.
But, putting that aside, let's assume cooler heads will prevail and default is avoided. Mission accomplished – everything will return to business as usual.
Not so fast.
Flashback to 2011: It turns out credit rating agencies don't care if lawmakers score a buzzer-beater to avoid defaulting on America's debt.
What mattered to the agencies when we played this same game in 2011 is that people lost a significant amount of confidence in the country's ability to repay its debts on time. That merited the first-ever downgrade of US debt. Markets didn't welcome that.
The next trading day after Standard & Poor's issued the historic downgrade, the S&P 500 shed more than 6% of its value. It took months for this index — which makes up the majority of Americans' 401(k) plans — to recover from the overall decline stemming from the debt ceiling and subsequent downgrade. But it ended the year virtually unchanged.
Why it matters: That market damage is certainly not lost on Treasury Secretary Janet Yellen. "One of the concerns I have is that even in the run-up to an agreement, when one does occur, there can be substantial financial market distress," she said on Wednesday. "We're seeing just the beginnings of it," she said, referring to stock and bond market volatility in recent days.
What the credit agencies are saying: There are three major sovereign credit rating agencies: Standard & Poor's, Moody's and Fitch Ratings. Each can use a different framework to evaluate how likely a country is to pay its bills on time. So what are the other two saying so far?
- Moody's: "We absolutely don't think there will be a scenario where we cross the X-date and interest payments will be missed," William Foster, senior vice president and senior credit officer at Moody's Investors Service, told CNN's Matt Egan Wednesday. "If we did, we would obviously have to change our view on the rating."
- S&P: Right before the debt ceiling was breached in January, S&P said it was "monitoring developments regarding the U.S. debt ceiling — and the potential implications for the U.S. sovereign credit." John Chambers, managing director and chairman of the sovereign rating committee at S&P in 2011 told The New York Times, "The current debate validates S&P's decision to cut the rating and leave it there."
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