Credit rating agency Fitch puts U.S. 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 likelihood 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 is expected to run out of money to pay its bills. Treasury Secretary Janet Yellen has estimated the x-date will arrive on June 1, while other analysts project a slightly later date.

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 are the sticking points in the debt ceiling negotiations?

House Speaker Kevin McCarthy and other Republican lawmakers want to cut federal spending instead of freezing it at current levels. To accomplish that, the GOP wants to add work requirements for Medicaid, the health care program for low-income Americans, and expand work requirements for the food-stamp program. 

"You have to spend less than you spent last year," McCarthy said Wednesday as House Republicans and White House officials resumed negotiations over the debt ceiling. "That's not that difficult to do, but in Washington, somehow that is a problem."

For their part, Democratic leaders have pushed to raise the debt ceiling without imposing conditions, arguing that discussions about spending cuts can take place after the government's borrowing cap is raised.

What do experts say about Fitch's warning?

Fitch's cautionary move underscores the danger that inching closer to a default poses to investors and citizens, said Joe Brusuelas, chief economist at RSM.

"This should create a renewed sense of urgency to lift the debt ceiling and bring this crisis to a close before it spills over into broader global financial markets and the economy," Brusuelas said in a report. "The longer this episode continues, the greater the risk that the global reserve status of the U.S. dollar will be put in danger."

What is the White House's response to Fitch?

The White House said Fitch's credit watch underscores the need to reach an agreement quickly.

"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.

In:
• Debt Ceiling

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