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AFP
AFP
World
Sebastian Smith

US warned debt standoff could hit credit rating

House Speaker Kevin McCarthy (L) has held several meetings with Joe Biden but the two sides are yet to reach a deal to lift the US borrowing limit. ©AFP

Washington (AFP) - Ratings agency Fitch put the United States on notice Wednesday that its perfect credit rating could be jeopardized if the White House and Republican opposition fail to overcome their impasse on raising the nation's borrowing limit, a week before a key deadline.

Fitch placed the country's AAA-ranked credit on "rating watch negative" -- a move it said "reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit" before June 1.

That is the "X-date" when the US Treasury Department says that -- short of an agreement -- the government will run out of money, triggering a default with likely devastating economic consequences for the United States and potentially worldwide.

"Fitch still expects a resolution to the debt limit before the X-date," Fitch 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 Treasury stressed that Fitch's move should serve as a wakeup call.

"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," Treasury spokesperson Lily Adams said in a statement.

And the White House urged Republicans to come to their senses.

"This is one more piece of evidence that default is not an option and all responsible lawmakers understand that," it said in a statement."It reinforces the need for Congress to quickly pass a reasonable, bipartisan agreement to prevent default."

Catastrophic impacts

President Joe Biden's administration said earlier Wednesday that it still sees a path to a deal, but there were few concrete signs that the two sides were finding agreement on how to raise the so-called debt ceiling, authorizing the government to borrow more money and keep paying its bills beyond June 1.

White House Press Secretary Karine Jean-Pierre said, however, that a "bipartisan, reasonable agreement" is still possible.

The alternative, she warned, is "catastrophic impacts in every single part of this country."

"We're talking about millions of jobs lost, devastating retirement accounts, and a recession," she said.

The two sides are divided by fundamentally different visions of how to manage the country's more than $30 trillion debt.

Biden's Democrats say Congress needs to approve automatically what is known as a "clean" debt ceiling raise -- that is, to authorize more government borrowing to cover expenses already committed to, but not funded, in the budget.It's essentially an accounting maneuver that Congress performs every year to adjust funding levels.

Republicans, increasingly dominated by a hard right faction loyal to ex-president Donald Trump, have decided to use this generally mundane procedure as leverage to force Biden into accepting severe spending cuts, notably targeting social programs.

Republicans say the cuts are needed to rein in out-of-control government spending.Biden's negotiators say they are ready to discuss taming the budget, but not when Republicans are holding the debt ceiling "hostage."

Deficit reduction

In the latest negotiating offer, Treasury Secretary Janet Yellen proposed to freeze government spending at current levels, something that she said would reduce the deficit by $1 trillion.

"The president's budget that he put forward actually proposes $3 trillion worth of deficit reduction over 10 years," Yellen said at a Wall Street Journal event on Wednesday.

"In this negotiation, the President has already offered changes that would result in an additional trillion dollars of deficit reduction," she added.

Other areas of compromise from the president include proposals to rescind unspent Covid-19 relief funds, a person familiar with the talks said, speaking on condition of anonymity.

However, Republicans have ruled out accepting White House plans to further tackle the deficit through tax increases on the most wealthy Americans and corporations.

House Speaker Kevin McCarthy, the top Republican in Congress, again ruled out passing a "clean" debt ceiling hike, but also said he thought progress would be possible.

"But let's be honest about this: We have to spend less than we spent last year.It is not my fault that the Democrats cannot give up on their spending."

The Republicans say their proposals would cut the deficit by $4.8 trillion over a decade but the White House described their plan as slashing assistance for the poorest while reinforcing tax cuts for the wealthy passed under Trump.

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