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Debt ceiling: Fitch puts U.S. ratings on negative watch

PunchBowl News Senior Congressional Reporter Andrew Desiderio joins Yahoo Finance Live to discuss the credit risks being associated with the debt ceiling situation as talks between President Biden and lawmakers linger closer to the default date.

Video transcript

JULIE HYMAN: Well, America's political partisanship could cost the nation its AAA credit rating. Fitch Ratings placing the country on ratings watch negative. Signaling it could downgrade if lawmakers are unable to raise the debt limit. While Fitch says it expects a resolution to be reached before the X-date, lawmakers failure to quote, "meaningfully" tackle fiscal challenges signals risks to us creditworthiness.

In 2011, S&P gave its first ever credit downgrade to the US. Remember, it cut its rating to AA plus. It sent Treasury yields down. More than a decade later, that agency still has not restored its ratings. Here to dive in deeper is Andrew Desiderio. Punchbowl News Senior Congressional Reporter. Thank you so much for being here, Andrew.

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So what's the latest here, first of all on the back and forth and what we know?

ANDREW DESIDERIO: Well, I can tell you, they made serious progress late in the day yesterday and overnight. The goal now is to have legislative text sometime over the weekend. So that House members can be notified of what McCarthy has called his 72-hour rule whereby, members have 72 hours to review legislation before it's put on the floor for a vote. There are still lots of issues to be resolved. And today is going to be really important for that.

But spending levels, they seem to be very close on that. They're very close on energy permitting as well. And they almost basically have an agreement in principle right now on clawing back unused COVID relief funds.

DIANE KING HALL: And Andrew, Diane here. So the COVID relief funds have been the low hanging fruit or seen as the low hanging fruit. And something that Democrats would have seemed to be recently willing to concede. But one of the sticking points has been this work requirement aspect that House Speaker McCarthy has been calling for concessions on what are you hearing on where things stand in the negotiations on that sticking point

ANDREW DESIDERIO: That remains the biggest hangup right now. It's really hard for the two parties to find a compromise position on this. Because with spending, you could just adjust the numbers. With work requirements, it's either you have them or you don't. And you figure out the extent to which they're implemented, who they apply to, things like that. So it's a much harder issue to tackle. And the White House is very concerned about this issue. Because frankly, there are a lot of progressives in Congress who are not going to vote for any agreement. They've already said they're not going to vote for any agreement rather. That includes new work requirements for social safety net programs.

So that's going to be a big challenge for the White House as they try to figure out what can actually get the requisite number of votes among the Senate and House Democratic caucuses.

JULIE HYMAN: Andrew, I've been thinking a lot about this debt ceiling thing because we've been thinking a lot about it, or talking a lot about it here, and, obviously, we've had this discussion so many times before. And the closer it gets, the more irritated I get. And I imagine that's true of people in Washington. I imagine that's true of the public market participants. I imagine that's true of Americans. It's just so dumb. The whole thing-- and I'm just curious like do people inside Washington see it that way? Because the spending cuts that they're quibbling over are really marginal here for the overall size of the debt, if they're really serious about the debt.

And why not divorce this from holding our debt rating hostage? I'm just curious inside the beltway if the view is the same as it is outside.

ANDREW DESIDERIO: Well, it's certainly the same for those of us who have spent ungodly number of hours staking out Speaker McCarthy's office, as these negotiators have come in and out and trying to get any morsel of information as we can. But I think the root of this is that Republicans control the House. They see the debt ceiling as a huge leverage point for them in a divided government. And frankly, it is. The debt ceiling is something that has to be raised no matter what.

And if Republicans come to the table with a series of demands, it's up to the White House and congressional Democrats to work with them and see if they can get a compromise, which is why they spent months saying, look, there should be no hostage taking, no brinksmanship surrounding the debt ceiling. We should just pass a clean debt ceiling bill. And get this over with and not scare the financial markets, scare the global markets, scare our creditors, things like that.

But of course, politics rules all here in Washington. And Republicans see this as a very important leverage point for them. And it's frankly, one of, if not, the chief reason that Speaker McCarthy won the speakership.

JULIE HYMAN: But it's leverage for getting nothing. It's what they're going to win in this so important. It just seems like the stakes are very high and the ROI, to talk in Wall Street terms, is pretty darn low.

ANDREW DESIDERIO: That's especially the case if the spending cuts are quite modest. And you're going to have these hard liners who put McCarthy in the speakership in the first place and not end up voting for whatever bipartisan product comes of it anyway.

The thinking is you're not going to get the far left. And you're not going to get the far right to vote for this. So you're going to get the reasonable center of both parties to get this over the finish line and get 218 votes in the House, 60 votes in the Senate. So to your point, it's like the people who are holding this up in the first place aren't going to be voting for the final product in the end anyway. So that's a lot of time how these things work in Washington.

DIANE KING HALL: Andrew, to your point about scaring the markets, that has happened more I noticed in the previous cycle, especially when we had the unprecedented event of the US credit rating being downgraded. Now, there is the threat of that again this time coming from Fitch. Let's hone in on this timeline. June 1 being the X-date. But there's still a time needed to vote. Is there a way that the timeline, especially particularly the voting timeline for lawmakers can be accelerated like, let's say, the deal runs right up to nearly upon X-date? Can the timeline for voting be accelerated?

ANDREW DESIDERIO: Well, the 72-hour rule is something that McCarthy has said he's going to stick to. This is the idea that once legislation is released, the House will not vote on it until 72 hours after that. The house can usually process legislation in one single legislative day. The problem really is the Senate, where it takes unanimous consent by all 100 senators to speed up the process and really make things happen.

Without unanimous consent in the Senate, you could see this take four or five, maybe even six days, legislative days that is. So Chuck Schumer's going to have a really tough job, if he wants to try to get this over the finish line as close to the X-date as possible. It seems very, very unlikely, if not impossible, to me that both chambers pass a bill by June 1. Just given the current timeline, the current constraints, as well as the rules of both chambers, particularly in the Senate, where it's a lot harder to pass a piece of legislation than it is in the House.

DIANE KING HALL: Yeah, exactly. And to your point about running up on that date, we've done that before. And then there are problems that even when you do reach a deal later, there are problems, there's a ripple effect of problems that occur like certain payments that have to be made, et cetera. But we're going to have to put a bookmark in our conversation for now. We still have days to continue this. So we do really appreciate you, Andrew Desiderio, Punchbowl News Senior Congressional Reporter. Our thanks to you.