McCarthy Signals Debt Deal Optimism as US Put on Credit Watch

House Speaker Kevin McCarthy’s optimism that White House and Republican negotiators would reach a deal in time to avert a potentially catastrophic default didn’t mollify analysts as the US was put on a sovereign ratings watch.

(Bloomberg) — House Speaker Kevin McCarthy’s optimism that White House and Republican negotiators would reach a deal in time to avert a potentially catastrophic default didn’t mollify analysts as the US was put on a sovereign ratings watch. 

The California lawmaker said Wednesday after a four-hour meeting between his and President Joe Biden’s hand-picked negotiators that a deal was possible before June — the date by which Treasury Secretary Janet Yellen has warned the US could run out of money to pay its bills.

“I still think we have time to get an agreement, and get it done,” McCarthy said after the meeting concluded. 

Hours later, Fitch Ratings placed the AAA credit rating for the US on watch, a sign of growing unease about the country’s ability to avert a first-ever default. The US received a credit downgrade during similar turmoil in 2011. 

Fitch still expects a resolution to the debt limit before the June 1 so-called “X-date.” Another firm, DBRS Morningstar, took similar action Thursday, putting the AAA grade for the US “under review with negative implications,” while still anticipating Congress to act in time.

Read More: US Credit Rating at Risk of Fitch Cut on Debt-Limit Impasse

US stock futures climbed Thursday morning, aided by positive earnings news, but other areas of markets signaled worry. A key money-market rate jumped, as lenders of cash appeared more skittish about making overnight loans backed by Treasury securities.

A White House spokesperson said late Wednesday the Fitch report demonstrated the urgency of reaching a speedy resolution to the debt ceiling standoff.

And a Treasury Department spokesperson, Lily Adams, said in a statement that “tonight’s warning underscores the need for swift bipartisan action by Congress to raise or suspend the debt limit and avoid a manufactured crisis for our economy.” 

On Capitol Hill, House Democratic Whip Katherine Clark blamed Republican “hostage-taking” for risking the US credit rating. 

‘Economic Problems’

“Even the ratings watch is going to cause economic problems,” she told reporters at the Capitol Wednesday night. “This is the beginning.” 

Representative Pramila Jayapal, chairwoman of the progressive caucus, said “This is the reality of what Republicans are driving us to, crashing the economy.”

McCarthy’s office had no response on Wednesday night to a request for comment on Fitch’s action.

Representatives for Biden and House Republicans began meeting about noon in White House Budget Director Shalanda Young’s office suite. The change in locale came a day after Republican Patrick McHenry, one of McCarthy’s negotiators, bragged that the talks have all been held in the Capitol because, in his view, the GOP has the upper hand.

Yellen said earlier Wednesday that the world is just seeing the beginnings of the potential market stress if the debt crisis continues.

Read more: Any Debt Deal Still Faces Time-Consuming Hurdles in Congress

JPMorgan Chase & Co. chief US economist Michael Feroli wrote to clients Wednesday warning that his team now puts the odds of hitting the June 1 “X-date” without a deal “at around 25% and rising.”

Yellen said the Biden administration’s focus is on completing a debt-limit deal rather than contingency planning for a default. She declined to specify what might be possible in terms of prioritizing some payments over others in the event the Treasury runs out of sufficient cash for all federal obligations.

Read more: Social Security Looms as Ultimate Enforcer of Debt-Limit Deal

“We are committed to not having missed payments and raising the debt ceiling,” Yellen said Wednesday via video conference to a Wall Street Journal event in London.

House Republicans have escalated their accusations that Biden lacks urgency in negotiations, while a Democratic aide called McCarthy unwilling to compromise across a wide spectrum of disputed points, threatening the legislative prospects of a deal.

House Democratic leader Hakeem Jeffries drew his own red line and said Democrats would only support a two year spending cap deal if the debt ceiling increases was two years. 

It is not unusual for Congress to strike budget deals at the last minute when the pressure becomes great enough to force negotiators to make painful choices.

House lawmakers are expected to leave town on Thursday for the Memorial Day holiday weekend. Republican leaders have asked that they be able to return on 24 hours’ notice, if a vote is called. 

If a default did occur, economists project it could send the US into a recession, with widespread job losses and higher consumer borrowing costs spilling into the coming election year.

“The current standoff over the US debt ceiling has the potential to wreak more havoc on the economy than any previous go-around,” wrote Bloomberg Economics chief economist Anna Wong. 

–With assistance from Anna Edgerton, Matthew Boesler, Steven T. Dennis and Jarrell Dillard.

(Updates with additional firm’s warning in fifth paragraph and refreshes markets action in sixth.)

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