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It was the year 1917 when the United States adopted the debt ceiling. The so-called debt ceiling, which by law of Congress (the Second Liberty Bond Act) establishes the maximum debt of the country’s government. He actually wanted to guarantee autonomy to the Treasury in delicate moments: to authorize it to issue securities without asking for constant parliamentary green light, in the face of the commitment required by the First World War.
Today, however, it is no longer a footnote in history, nor an instrument of flexibility. On the contrary, it has become a catalyst for spiraling political and fiscal crises. Fueled by surges in debt and, even more, by a polarization between the two major American parties, Democrats and Republicans, which makes it increasingly difficult to manage the open challenges. So much so that it periodically brings to the fore ghosts of default and government paralysis, so far averted by extraordinary accounting maneuvers and agreements patched up in extremis.
Fitch’s move
It is to this problematic context that Fitch’s decision to downgrade the US credit rating alludes. Beyond the discussions on merit and timing (criticized by the Biden administration) and on the close impact on the economy and markets (limited according to many analysts in the face of the continued solidity of the US), those two issues, fiscal and political, remain unresolved. Fitch’s move certainly shines a spotlight on them, threatening a new blow to the image and perhaps credibility of the world‘s leading economic power. In fact, it becomes the second of the big three credit rating agencies to downgrade the US, depriving it for the first time of the maximum security triple-A rating, after Standard & Poor’s made a similar choice, confirmed so far, in 2011, increasing the pressure on Washington to change course.
The worsening
The worsening debt load is in the long trajectory of the figures. It has exceeded 32,000 billion – equal, that is to say, to almost one hundred thousand dollars per capita. The congressional research office sees him, without intervention, crossing the 50 trillion milestone in a decade. The most significant component, that held by the public (which excludes the more than 20% held by government bodies and agencies) has risen to 100% of GDP in 2020 (135% counting the debt in its entirety), a 74-year record ; it should cross that threshold in 2024 and jump to 119% by 2033. It is growing today in step with interest on debt, payments have increased by 25% this year since 2022, and continuous annual deficits. It crowns a hiccups that has accelerated since the 1980s of Ronald Reagan, under presidents of both parties, chasing resources for huge tax cuts (traditionally Republicans), social spending actions (Democrats) but also wars, responses to crises from the Great Recession of 2008 to Covid and the need for programs that march with the aging of the population (pensions and health care). Result: in twenty years the debt has ballooned by at least 25 billion by imposing new borrowing.
Escalation
However, the debt trend alone does not trigger a crisis, with the USA benefiting from its position as the leading economy and the dollar as the reserve currency and international reference. The role of fuse belongs to politics. If adjusting the debt ceiling was a routine operation, which has occurred 79 times since the 1960s, 49 with a Republican and 30 a Democrat in the White House, now it has become an occasion for battle. Hostage of the divisions between the parties, which accuse each other of bringing disaster to the country. The alarm bell rang in 2011: the country came close to default in the confrontation between President dem Barack Obama and the Republicans in Congress. A frantic compromise did not prevent S&P’s unprecedented downgrade. The shock on the markets saw the stock market drop 7%, even if the repercussions proved to be temporary.