As the debt ceiling becomes an increasingly dramatic political pantomime, the reality of default is becoming correspondingly more material.

As the debt ceiling becomes an increasingly dramatic political pantomime, the reality of default is becoming correspondingly more material. Ratings agency Fitch have placed US ‘AAA’ debt on Rating Watch Negative, indicating the possibility of a downgrade.

The US does not command the top ‘AAA’ rating because of its financial fundamentals. The US balance sheet is plagued by high interest payments and a debt figure of $31.8 trillion - and growing. Rather, it is the prestige of the US as a financial institution, with its role as the world economy’s underwriter and the dollar’s reserve currency status, that gives US credit ratings such buoyancy. Deliberations on whether to increase the debt ceiling undermine this institutional strength. This week, US Treasury Secretary Janet Yellen warned that if the debt ceiling was not raised by as early as June 1, the US would be at risk of defaulting on its  obligations.

The stress of negotiations is evident in financial markets, with one-month Treasury bills due in June trading at highs of near 6%. Treasury bills maturing on June 1, the so called “X-date”, are trading under pressure at over 7.6%. While rating agencies and commentators alike expect a resolution, damages have already permeated into the financial system.

A deal is not a cure:

A debt ceiling agreement is no guarantee of US credit maintaining its top rating. There already exists a precedent. The 2011 S&P downgrade of US debt occurred four days after the US Congress raised the debt ceiling.

With the debt ceiling being increasingly politicised within a bipolar political climate, the probability of congressional cooperation on raising future debt ceilings appears less certain. Even more theatrical displays of cross-party brinkmanship increase the risk of default and pose a threat to the nation’s debt security.

Both sides of the aisle know a default would be globally disastrous and there is a very small likelihood of Congress allowing it. However, the combination of bombastic, overly politicised headlines and a will-they-won’t-they narrative may have already done their damage in the eyes of ratings agencies.

Brinkmanship within Congress is not favourable for the credibility of US Debt. As politicians become more daring, future negotiations seem likely to make for an even more tense dramatization.