DBRS, Inc. (DBRS Morningstar) placed the United States of America’s Long-Term Foreign and Local Currency – Issuer Ratings of AAA Under Review with Negative Implications. In addition, DBRS Morningstar placed the United States of America’s Short-Term Foreign and Local Currency – Issuer Ratings of R-1 (high) Under Review with Negative Implications.
KEY RATING CONSIDERATIONS
The Under Review with Negative Implications reflects the risk of Congress failing to increase or suspend the debt ceiling in a timely manner. If Congress does not act, the U.S. federal government will not be able to pay all of its obligations. The precise timing of when the federal government will exhaust available cash and extraordinary measures, the so-called X-date, is somewhat unclear. However, Treasury Secretary Janet Yellen reiterated her warning on May 22 that the X-date could come as early as June 1. Judging from the latest data on daily net inflows into the Treasury General Account, we believe it is reasonable to assume the X-date could arrive within weeks if not days.
While we still expect Congress to raise the debt ceiling before Treasury runs out of available resources, there is a risk of Congressional inaction as the X-date approaches. DBRS Morningstar would consider any missed payment of interest or principal as a default. In such a scenario, the relevant U.S. Issuer Ratings would be downgraded to “Selective Default.”
Alternatively, the U.S. Treasury may prioritize debt payments following the X-date in order to avoid a default. However, prioritizing debts payments for a meaningful period of time would likely lead to a rating action, as we assess that such a strategy would have a highly negative impact on the economy and could quickly run into legal and operational challenges. Similar challenges could arise if the Administration instructs the Treasury to ignore the debt limit or bypasses the debt limit through some other strategy. In addition, failure to lift the ceiling in a timely manner could indicate that political polarization is affecting the quality and predictability of U.S. policymaking.
Even if Congress ends up increasing the debt ceiling prior to the X-date, the prospect of repeated debt ceiling standoffs in a polarized political environment may lead DBRS Morningstar to judge that U.S. credit risk has increased to a level that is no longer consistent with a AAA rating.
While the debt ceiling impasse poses a potential threat to the United States’ AAA rating, the U.S. has exceptional strengths that support the credit profile. The U.S. economy is very large in scale, accounting for one-quarter of global output. The economy is highly resilient to shocks, given its diversification across industry and geography, its flexible labor market, and its global leadership position in terms of research and innovation. U.S. financial markets and the U.S. dollar are at the center of world trade and capital flows, which provides the U.S. with an unusually high degree of financing flexibility. In addition, the country benefits from well-established democratic institutions, a strong legal system, and transparent governance. While a late debt payment could erode the reputation of the dollar as the world’s primary reserve currency and U.S. government bonds as global safe-haven assets, the fundamental credit strengths of the U.S. would likely continue to support the ratings.
One potential outcome of the current negotiations is that the next debt ceiling discussion could be pushed out beyond next year’s election. Future congresses could overhaul the debt ceiling to reduce the threat of default or eliminate it entirely, although any action on this front would likely require bipartisanship to overcome a filibuster in the Senate.
The Review period will focus on whether Congress lifts the debt ceiling in a timely manner, how the U.S. Treasury responds if Congress is late to increase the debt ceiling, the economic and financial fallout if the federal government fails to pay its obligations on time, and the likelihood of recurring debt standoffs in the near term.
The rating could be confirmed at AAA if Congress lifts the debt ceiling in a timely manner, and risks stemming from debt ceiling brinksmanship in the near term are deemed to be relatively low.
The ratings could be downgraded if: 1) the U.S. Treasury fails to pay all of its debt obligations on time, 2) the federal government builds up material non-interest arrears, or 3) there is a high likelihood of repeated debt ceiling standoffs in a climate of heightened political polarization.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments:https://www.dbrsmorningstar.com/research/414456.
All figures are in USD unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
The principal methodology is the Global Methodology for Rating Sovereign Governments (August 29, 2022) https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
The primary sources of information used for this rating include U.S. Department of Treasury, Federal Reserve Board, Congressional Budget Office, Office of Management and Budget, Bureau of Economic Analysis, Bureau of Labor Statistics, Bank for International Settlements, International Monetary Fund, World Bank, S&P Corelogic, and Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rating was not initiated at the request of the rated entity.
The rated entity or its related entities did not participate in the rating process for this rating action.
DBRS Morningstar did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is an unsolicited credit rating.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
The last rating action on this issuer took place on April 11, 2023.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
Lead Analyst: Michael Heydt, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: September 8, 2011
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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