HONG KONG (AFP): Most Asian equities sank Thursday on fears of a US default as the struggle to hammer out a debt deal led Fitch to warn the country’s gold-plated credit rating was at risk.
Nerves have been rattled across global markets owing to a lack of real headway in the standoff on Capitol Hill to increase the US borrowing limit so it can meet its debt obligations.
Talks earlier this week between President Joe Biden and Republican House Speaker Kevin McCarthy were described as “productive” but the two sides have made little progress since, with Republicans demanding spending cuts but Democrats calling for a “clean” increase.
And analysts said that while there is a broad expectation an agreement will finally be reached — likely at the last minute following a period of brinkmanship — investors were growing increasingly agitated and risk-averse.
On Wednesday, the uncertainty led Fitch to put the country’s AAA-ranked credit on “rating watch negative”. The firm said the move “reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit” before June 1, when the US Treasury Department warned the government will run out of money, triggering a default.
Most economists warn that the failure of the United States to pay its bills would likely have devastating economic consequences for markets and the global economy. “Fitch still expects a resolution to the debt limit before the X-date,” the ratings agency said in a statement.
“However, 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.”
The announcement raises the possibility of a first ratings downgrade since S&P did so during a similar standoff in 2011. Tony Sycamore, of IG Australia, called the move “a bit of a slap” to both sides.
“It just adds urgency that these two guys get together, or these two parties get together because their lack of action is making the ratings agencies nervous, and I think the markets are very nervous as well,” he added.
